Question

Case 2: Microsoft Corporation

Question: Microsoft is the leading developer of software in the world. To continue to be successful Microsoft must generate new products, which requires significant amounts of cash. The following is the current asset and current liability information from Microsoft’s current balance sheets (in millions). Following the Microsoft data is the current asset and current liability information from

Oracle’s current balance sheets (in millions). Oracle is another major software developer.

Part 1 (Cash and Cash Equivalents)

1. Instructions
2. What is the definition of a cash equivalent? Give some examples of cash equivalents. How do cash equivalents differ from other types of short-term investments?
3. Calculate (1) the current ratio and
   (2) working capital for each company for 2014 and discuss your results.
4. Is it possible to have too many liquid assets?
5. Part 2 (Accounts Receivable)

Microsoft provided the following disclosure related to its accounts receivable.

Instructions

1. Compute Microsoft’s accounts receivable turnover for 2014 and discuss your results. Microsoft had sales revenue of $69,943 million in 2014.
2. Reconstruct the summary journal entries for 2014 based on the information in the disclosure.
3. Briefly discuss how the accounting for bad debts affects the analysis in Part 2 (a).

Short answer

Answer

Oracle’s current ratio is higher. Based on these measures, Oracle is more liquid. The current ratio of Oracle is more than Microsoft. Microsoft has more working capital. Net credit sales are 3.78 times, and bad debt expense is $16.

Step-by-step solution

Step-by-Step SolutionStep 1: Meaning of Trade Receivable

In accounting, trade receivables can be anything sold that a company owes another company. In other words, trade receivables are what a company owes for goods and services.

(1 a) Explaining cash equivalent.

Generally speaking, cash equivalents are short-term, highly liquid assets that (a) can easily be converted to cash and (b) are close to maturity, posing little interest rate risk.

An investor can only invest in a product with an initial maturity of three months or less. Treasury notes, commercial paper, and money market funds are some examples of cash equivalents.

(1 b1) Determining the ratios for different companies.

Calculating the current ratio of Microsoft

$\begin{array}{c}\text{Current\hspace{0.17em}ratio}=\frac{\text{Current\hspace{0.17em}asset}}{\text{Current\hspace{0.17em}liabilities}}\\ =\frac{\$114,246}{\$45,625}\\ =2.50\end{array}$

Calculating the current ratio of Oracle

$\begin{array}{c}\text{Current\hspace{0.17em}ratio}=\frac{\text{Current\hspace{0.17em}asset}}{\text{Current\hspace{0.17em}liabilities}}\\ =\frac{\$48,138}{\$14,389}\\ =3.35\end{array}$

(1 b2) Calculating Working capital.

Calculating working capital for Microsoft

$\begin{array}{c}\text{Working\hspace{0.17em}capital}=\text{Current\hspace{0.17em}asset}-\text{Current\hspace{0.17em}liabilities}\\ =\$114,246-\$45,625\\ =\$68,621\end{array}$

Calculating working capital for Oracle

$\begin{array}{c}\text{Working\hspace{0.17em}capital}=\text{Current\hspace{0.17em}asset}-\text{Current\hspace{0.17em}liabilities}\\ =\$48,138-\$14,389\\ =\$33,749\end{array}$

Oracle’s current ratio is higher. Based on these measures, Oracle is more liquid.

(1 c) Determine the possibility of having too many liquids.

Yes, a corporation might have an excessive amount of liquid assets. Liquid assets yield little or no profit. Investors in businesses like Microsoft see 30 percent returns on their money. As a result, Microsoft's significant quantity of liquid assets may limit its ability to achieve investor expectations.

(2 a) Computing Microsoft accounts receivable turnover for 2014

$\begin{array}{c}\text{Account\hspace{0.17em}receivable}=\frac{\text{Net\hspace{0.17em}credit\hspace{0.17em}sales}}{\text{Average\hspace{0.17em}account\hspace{0.17em}recivable}}\\ =\frac{\$69,943}{\frac{\$19,554+\$17,486}{2}}\\ =\frac{\$69,943}{\$18,515}\\ =3.78\text{\hspace{0.17em}times}\end{array}$

(2 b) Preparing journal entries

Date	Particular	Debit ($)	Credit ($)
	Bad Debt Expense	16
	Allowance for Doubtful Accounts		16
	Allowance for Doubtful Accounts	51
	Accounts Receivable		51

(2 c) Explaining accounting for bad debts

Step 8: (2 c) Explaining accounting for bad debts