Analysis of performance
From above ratios it could be observed that company is operating is appropriate manner as is debt-equity ratio is more than 2 and even an increasing trend can be observed in the dividend paid (Wolf, 2014). The company is financially viable too, and the same can be accessed through significant interest coverage ratio.
Accounting treatment of various assets
|Depreciation||No allocation of depreciation on assets is done on different segments for reporting presentations. A part of depreciation is stated as an overhead; this is because it is impracticable for the company to identify separate amounts of depreciation by each segment that is included in the profit or loss. (AAS 116)|
|Inventory||The company reflects its inventory at average cost, subjected to the one which is lower (cost or market). The cost includes materials, labour, and manufacturing overhead which arises at the time of purchase and production of inventories. (AAS 102)|
|Capitalization||The company capitalizes all software costs until the final product released to the end users. The capitalized costs of software development are amortized over the estimated lives (Approaches to Calculating the Cost of Capital. Boundless Finance, 2017). Once the development reaches the technological feasibility, then the costs associated with such software are capitalized and amortized in terms of future expected benefits. (AAS 4)|
|Valuation||The company uses quoted prices for identical assets or liabilities wherever applicable, in active markets, for determining the fair value of the financial instruments (Van Dooren, Bouckaert and Halligan, 2015). Model-based valuation techniques are used by the company for the valuation of all the inputs. (AAS 3)|
- Treatment of intangible assets- Microsoft tests their intangible assets for recoverability; in the light of changes in circumstances of a shift in strategic direction and profitability expectations. Based on the results of our testing in the last fiscal year, it was determined that the company would not be able to recover their carrying value and as a resulting impairment was charged to the extent of the estimated fair value. Intangible assets are amortized on straight line method (Johnson and Scholes, 2017). The estimated life of identifiable intangible assets is expected to be 6.3 years.
- Differences in financial reporting- As per the analysis, there have been no differences in the financial reporting of the company as compared to International Accounting
1.3 Comparative Performance
After comparison of the financial performance of Microsoft to its competitors, it can be said that the Total Revenue of the company decreased in 2015’s the 3 quarter -12.16 %. As opposed to this, the revenue for other companies in the industry and the industry as a whole increased by 29.94 %, in the same quarter (Shahzad, Rutherford and Sharfman, 2016). Although Microsoft is a better performer from companies like Dow Jones Industrial, the company has been continuously suffering from strong competition from Apple. Inc.
Microsoft mainly focuses on the analysis of processes undertaken within the organization by fundamentally rethinking the way they improve customer service, reduce operational costs thereby becoming world-class competitors (Saeidi and et al. 2015). Each process that either result in finished good or as a base for the next process is evaluated separately. In the IT industry’s which is multi-process, generic benchmarking is used to comparing information.
Treatment of indirect and direct cost– The direct costs are added to the cost of the product whereas the indirect costs are reflected as an expense in the income statement or P&L account.
Different cost treatment of job, process and contracts
- Job costing: as per this method, identification of costs is made for each work separately because each job entails its own specifications and scope.
- Contract costing:Contract costing is performed when the company invites tenders for web development which involve heavy expenditure during an extended period of time (Wang and Sarkis, 2013).
- Process costing– when a company engages in activities which involve a lot of processes like that of Microsoft, this kind of costing is used. Microsoft develops its software through a planned series of steps.
- Absorption costing- This costing type has its origin from managerial accounting which expenses all costs associated with developing a particular product; this type of costing is the time required by external reporting GAAP (generally accepted accounting principles). Absorption costing is done for costs which are directly relatable to the development of the product (Tantalo and Priem, 2016).
Distinction between fixed and variable cost
A company’s cost which is linked to the amount of goods or services it produces is called variable cost. The variable cost of the company increases and decreases with the volume of production undertaken. On the other hand, the costs which do not vary with the level of output are known as a fixed cost. This part of cost remains constant at each level of production.
|Cost volume profit analysis||Short-term decision analysis
|The analysis is applied to ascertain the manner in which change in cost and volume affects operating as well as net income of company (Harrison and Wicks, 2013). For accomplishing the analysis, various components such as sale price per unit are assumed constant.||This technique is used by the company as a new way for evaluating costs which assist in managerial decision making. Instead of evaluating components of cost this analysis, re-arranges the costs into variable costs, fixed costs, and mixed costs (Rivera, Muñoz and Moneva, 2017). In this technique, the company allocates salary to fixed costs and bonus to variable costs.|
Relevant cost and its application to decision-making
The objective cost of a business decision is determined by relevant costs. An objective measure cost of a decision is a number of cash outflows that result from its implementation. Thus, it assists in decision making through revealing the amount of cash outflow resulting from a cost. Some of the relevant costs are future cash flows, avoidable cost, opportunity cost and incremental cost.
Role and Limitations of Traditional Budgets
A detailed statement of financial results that are predictable for a given period of time in the future is known as the process of Budgeting. Traditional functional budgets can be effective only when the organization is divided into many units which together contribute to organizational goal (Mir and Pinnington, 2014). If the entity runs on the basis of annual goals, it may need a functional budget for a short period just to keep the company on the right track.
- Problems and motivational impact of functional annual budgets – The problem associated with functional budgets is that it created unnecessary pressure in the mind of the staff and promoted unhealthy competition (Guerreiro, 2015). However, if communicated in a positive way can provide a guide to managers and their employees in achieving the organizational objectives.
Alternatives to functional budgets
|Activity-based budgets||This type of budgeting is the one in which the activities of the organization which incur costs are recorded, and their relationships with each other are defined and analyzed.|
|Continuous Budgets||It is the process of continually adding months to a multi-period budget with each passing month by revising the assumptions of the budget for every incremental period of the budget (Endrikat, Guenther and Hoppe, 2014).|
|Beyond Budgeting Roundtable||This technique emphasizes a holistic focus on the objectives to be achieved and their relation with the processes undertaken to accomplish them. Microsoft encourages full-scale recreation of processes instead of sub-processes being optimized.|
Role of Activity-Based Management
- ‘Relevance lost’ –The traditional system of accounting overhead is done through allocating it to the product in the proportion of direct labour or machine hours which may not reflect the actual consumption of resources. There is a relevant loss of useful resources as the traditional management accounting fail to provide accurate product cost (Grant, 2016). The traditional system of accounting has failed to keep pace with new technologies by focusing on short-term profits instead of short-term financial measure of non-performance. Traditional accounting focuses on volume-related drivers, like labour hours, while the modern costing method uses transaction-based drivers, like a number of orders received.
Appraisal of activity-based costing (ABC)-
This technique is considered as the modern alternative to the traditional system of accounting that is absorption costing; this allows the managers to understand the product and net profitability in a much better way. This also provides the management with improved information for making value-based and leading to more effective managerial decisions. ABC technique focuses on cost drivers- the activities increase costs. Thus this technique gives accurate results in terms of cost and profitability.
Activity-based costing fills the information needed for re-engineering and benchmarking by providing cost of each activity separately. This costing method also provides operating information about the true cost of services, products, processes, distribution channels, activities, customer segments, projects and contracts (Garcia‐Castro and Francoeur, 2016). Activity-based management provides value analysis, cost drivers, and performance measures that initiate improvement efforts and decision-making.
Cost Management Methodology
Relationships among lean enterprise, business excellence and value chains
The concept of lean enterprise focuses on process and product innovation. Innovation is not just constrained to the product but also on the value chain and business system. This concept of lean management is extended to organization level. Implementation of principles of lean enterprise and innovation process of value-chain throughout the organization improves the financial performance of the company (Bodie, 2013). By lean enterprise, it is possible to outline company’s advantages of baseline and its network of lean value. The value chain of Microsoft does not include the traditional activities.
Contribution of financial analysis
|Cost-benefit of quality||Throughput accounting||Analysis of waste||Value analysis of the activity chain|
|· A systematic approach for estimating the cost and benefit for controlling quality. The options that provide benefits are preserved.||· The principle-based approach that provides managers with information that supports decisions for improvement of enterprise profitability.||· For the purpose of achieving a general objective of cost reduction is important to analyze the activities which do not contribute to the product. This is done by process management through implementation of the lean business process model.||· A strategic tool for analyzing internal activities of the firm. The main analysis is to recognize the activities which are most valuable to the entity and the ones that need improvement to provide a competitive advantage.|
Resource audit of the value chain
Competitive advantage is gained operational segment which is part of primary activities through application of intelligent cloud which comprises public, private as well as hybrid server products. The further highly complicated supply chain is maintained by Microsoft without any disruptions in order to access competitive advantage.
The key that opens up avenues for management accounting is competitive assessment advantage and strategic management in response to competitors (Baños-Caballero, García-Teruel and Martínez-Solano, 2014). By contributing to strategic decisions in the company, as well as more effective control of their operation, management accounting provides necessary information for cost and profitability.
Appraise investments in advanced technology by incorporating tangible and intangible benefits
- The company has invested in gaming roadmap over the next 18 months anchored by two significant releases – Xbox One S and Project Scorpio and has also made investments in areas of growth like virtual and reality videos, and e-Sports.
- The company is also investing its financial resources in an extensive portfolio of hardware configurations and designs for Windows 10
Application of balanced scorecard to support the achievement of strategy and vision
|Financial||New pricing||% of revenue from new applications||Improving channel mix and reduction in the cost of the transaction.|
|Customer||Increasing the belief of customer through enhancing loyalty||75%|
|Internal Business Process||Efficient desktop support for CS &M employees||No. of desktop services request which was completed||500|
|Learning and Growth||Increase leadership position in OS market||Increase market share of SQL 7.0 by country region (Microsoft Corp (NAS:MSFT) WACC Microsoft Corp MSFT, 2017)|
Strategic planning: this is the first stage in resource allocation. This stage is concerned with planning vision and goals for the future. The vision and strategic goals are accomplished through achievement of objectives (Guerreiro, 2015).
Budgeting- in this stage, a budget is set for each activity to which the resources are to be allocated. Resources are allocated on the basis of strategic planning and identifying that which areas need maximum and minimum resources.
Logistical management- at this stage the resources are moved physically to areas requiring them.
Criteria to evaluate the allocation of resources–
- One of the most important tools used by Microsoft to assist and monitor the resource allocation program is the APR technique. Annual Performance Report is a reporting tool which is used to track progress and accomplishments of resource allocation programs and inform the management about the competitive advantage (Grant, 2016). The APR can is an effective management tool that provides with high data quality to evaluate the entire process if resource allocation.
- Identification and management of gaps between strategic need and availability-Gap analysis provide the guide on how to develop strategies and initiatives for closing gaps and mitigate associated risks by classifying activities on profitability and priority basis.
Re-engineering and business re-engineering
Microsoft continually seeks to radically restructure their organizations by concentrating on the basic designs of their business processes. A business process can be reoffered to as set tasks which are logically related to each other and capable of being performed to achieve a defined outcome in the business.
- Principles of re-engineering and its impact on management style
Radical redesign associated with BPR has a positive correlation with the processes and performance of the organizational. In this way, the management enhances the potency and productivity of the business because BPR involves increment in the standard price of the product. Implementation of BPR will also increase (Mir and Pinnington, 2014). BPR implementation can also have some negative impact on organizational performance since the execution of new processes may encounter problems of adjustment and change in the style of management.
- Use of processes to eliminate delayed and unnecessary activities
For the purpose of eliminating unnecessary activities, there is a need to develop lean business processes by managing processes and auditing from point to point; this improves processes through reducing the time caused managing assets. Process management emphasizes on prevention of waste and elimination of existing waste.
Alternative forms of Benchmarking
Benchmarking is performed in respect of the competitors and data is analyzed in terms of what causes superior performance as compared to the competitor.
This is used by an organization which has multiple units working in a similar country.
Each process is compared to a similar process in other industry.
Microsoft works on Generic benchmarking where the focus is placed on technology innovations to be achieved.
Dynamics and stages of benchmarking
PLANNING- the processes to be benchmarked are identified along with the basis of comparison.
ANALYSIS- the performance gap between the base for benchmark and the processes are analyzed on the basis of data gathered.
INTEGRATION- preparing for implementation of the action.
ACTION- actions are implemented to the processes
MATURITY- involves continuous monitoring and learning of the changes in the processes.
- Best in- class Benchmarking- The inherent issues with best in class benchmarking is that it is difficult to identify and analyze the best in class performance level when the standard set is different from the benchmarked unit.
|Profit maximization||Shareholder’s wealth maximization|
This objective is achieved when the company retains all its earnings for future investment.
This objective is achieved when the earnings and profit are distributed among the shareholders.
- Shareholders Expectations and interest- The Company has to strike a balance between both the above mentioned contradictory objectives. The shareholders of any company would desire increment of their share invested in the company, and at the same, they are also interested in the expansion of the company they have invested in.
- Tensions between managers, shareholders and debt providers- The interest of all the three groups has to be kept in mind while formulating corporate strategies. Managers want increased remuneration of investing their skill in the company (Rivera, Muñoz and Moneva, 2017). Shareholders want maximization of their wealth and debt providers desire increased interest on their amount. All the three objectives have to be managed by effective financial management.
Alternative sources of finance
This can prove beneficial for the company when the major objective is to pursue growth and expansion especially when the amount can be acquired at low-interest rates. The major drawback which accounts for the company with the debt capital is that it is mandatory to pay interest even if the company incurs losses.
This source is beneficial for the company when they need sustained investment in business and return on investment to shareholders is not mandatory for the company (Wang and Sarkis, 2013). The drawback of this source of finance is that the shareholders get a stake in the management of the company which can dilute the powers.
Debt can be beneficial from the investor point of view in a way that they are secured sources (Tantalo and Priem, 2016). The drawback is that the debt holders do not get a stake in management.
Equity is an unsecured and hence risky form of investment, however, the stake in management comes only with equity investment.
The cost of raising such form of finance is much lower to the equity.
This is an expensive source of raising finance in the form of formalities to be fulfilled before raising equity.
Operating and financial leverage and the opportunities, dangers of different levels of gearing
|Risk of gearing||Advantage of gearing|
|· The decrease in value of Investments.||
· Support in taking profitable projects.
· Borrowing is cheap option in comparison to other such as issue of share
|· Interest rate increases|
Role of Treasury Management
The key role of treasury management is planning and controlling of cash assets to achieve an appropriate finance mix by appropriate
- corporate financial planning,
- working capital management,
- Funding management
- Currency management
- Finance management.
Risk management by Treasury manager
The risks associated with the management of finance are fluctuating exchange rates and interest rates and prices. Risk management is done by treasury management by transferring risks by applying hedging techniques that are compatible with the internal policies of the organization. Treasury Managers use techniques like Options, futures and swap to hedge their risks.
Alternative working capital policies and dangers of liquidity issues
Figure 4: Working Capital Policies
Each of the above-listed policy has their own liquidity issues depending upon the level of working capital required by the organization. Liquidity issues can pose some serious issues to the company by posing a hindrance to daily operations (Working capital management, 2017). On the other hand, excess working capital may not ensure appropriate use of finance.
Profit can be termed as the revenue which a company earns from its sales (Capital Investment Appraisal, 2017).
Cash is the main source of survival of the business. It includes cans in hand and cash at the bank. Cash may not necessarily profit and profit may not be necessary for cash (Berry, 2017).
Profit plays a major role in long-term investment decision, as the greater the profit greater will be the investment in expansion.
The availability of cash decides the investment decisions of any company.
Accounting rate of return, payback and net present value of an investment proposal
Microsoft has decided to buy all output from 110 MW wind farm for a period of 20 years. An investment of approx $1 billion has been made by the company. It has been expected that the amount will be recovered in a period of 20 years. The payback period is 20 years.As it is part of emerging market higher rate of return is expected from the investment.
Investment appraisal techniques
Figure 5: Appraisal Investment techniques
Elements of capital
The two important elements of capital that are the equity and debt have been explained in detail under alternative sources of finance. As far as preference share capital is concerned, it can be said as a balance between the debt and equity and contains features of both. The company has to pay a necessary return on these shares also they have a stake in management, with utmost security at the time of dissolution.
Weighted Average Cost of Capital
|10.17% (Appendix 3) (Microsoft Corp (NAS:MSFT) WACC Microsoft Corp MSFT, 2017)|
The benefits and limitations of the different approaches for computation of the cost of capital
|CAPM||· Measures risk and return on investment after considering market risk||· Complex model|
|Discounted cash flow approach||· Highly useful tool for calculating the net present value.||· Uncertain, since these relate to future cash flows.|
|Bond Yield Plus Risk Premium||· Suitable for calculating company’s value.||· Time-consuming.|
Strategic investment opportunities
- Strategic fit– Gaining an understanding of the organization’s environment is one of the prime purposes of strategic analysis. The core competencies of the firm lay in its innovation strength in the field of IT.
- Acceptability and feasibility- The scale of investment needs to be achievable in terms of resources. This requires identification of options with a continuous process of planning implementation (Van Dooren, Bouckaert and Halligan, 2015). The stakeholder expectation and strategic capability of Microsoft are in favour of its investment in new launch of windows.
Quantitative and qualitative issues of strategic proposals
- Role– IFIs are an important to form of project financing in the company as they support large-scale IT projects in emerging markets. They can provide capital and catalyze the contribution of other players (Andromeda Simulations International, 2017).
- Financial risk– the major financial risk associated with IFIs is the rate of exchange which is never constant and poses difficulty in accounting.
Approaches to managing risk and complexities of capital budgeting
Evaluation of forward rates and capital project
The forward rate of the share price of Microsoft as on 13th Oct 2017 is $23.9. (Microsoft Corp MSFT. Forward rate, 2017). Presently the company has invested in international patents and also in other international investment. In case of an international project, it is necessary to assess forward rate and exposure relating to same. The reason behind same is that higher risk exists in this transaction and same affect significantly on the profit of business (Annual Report Microsoft, 2017). Thus, the decision should be prudency so that negative effects relating to same can be mitigated.
Indirect benefits of International Financing
Internal and External Sources of Finance
- An external banking system that works simultaneously with domestic banking.
- The transactions of this bank are an interbank transaction of more than 1000000.
- Works as a normal bank by providing loans and seeking deposits at an agreed interbank rates.
Figure 10: Types of Risk for the Company
Degree of Organizational control
The company exercises strategic control, by the strong informational support provided by management accounting. This assists the company is gaining competitive advantage and strategic position through filling the gaps within the need and availability (Tantalo and Priem, 2016). By providing competitive information, management accounting facilitates organizational control.
Additional risks associated with international Operation and their management
The additional risks associated with international operations apart from financial risk are
- Political risk
- Economic risk
- Legal Risk
- Transaction risk
These risks can be managed by a thorough understanding of the situations existing in the international market and then formulate strategies.
Risk map and surveys
Contingency plans for dealing with potential risk
Cloud-based services and market relating to device and software is highly competitive. Derivative instruments have been applied to organize risk issues relating to foreign currencies, equity, interest rates and for facilitating diversified portfolios (Wolf, 2014). Further, broad-based commodity exposures have been applied by the company for enhancing the return and assessing diversification. Moreover, these indices are applied to manage economic risk relating to rate of return
Techniques to manage risk
Risk Management Report
Formal risk management can be specified as a necessity for a company like Microsoft; where a lot of international transactions are involved, and investment has been made to. Through assessing this report company will be able to assess the extent of existing risk and the manner which same should be dealt.
Emphasis on sensitivity and its impact
Risk management report assesses the sensitivity of major variants such as interest rate, share price etc. Further after analyzing the same emphasis is made on such variants so that it can be beneficial for the company through modifying the manner of business operations.
Analysis of management of risk
The company is exposed to economic risk from the interest rate, equity prices, commodity prices and credit risk. Foreign currency exposure is assessed on a daily basis and hedging is applied to the possible extent in order to mitigate the risk (Tantalo and Priem, 2016). Credit risk is managed through forwarding purchase commitments of mortgage-backed assets in order to gain exposure relating to agency mortgage-backed securities.
|(Amount in $ million)|
|Working Capital Ratio||139660/59357||122797/49647|
|(Current Assets/ Current Liabilities)||2.35||2.47|
|(Net Sales/ Closing Inventory)||37.90||32.25|
|(Profit / Sales)||0.19||0.12|
|Asset Turnover Ratio||85320/193694||93580/174472|
|(Net Sales / Total Assets)||2.51||0.54|
|Debt to Equity Ratio||(121697-59357)/71997||(94389 -49647)/80083|
|(Debt / Equity)||0.87||0.56|
|Interest Coverage||20182/ 1243||18161/ 781|
|(EBIT/ Interest Expenses)||16.24||23.25|
|(Long term liability / Capital employed *100)||46.41||35.84|
|Dividend declared per share||$1.44||$1.24|
Operating and Financial leverage ratio:
|(Contribution Margin / EBIT)||2.60|
|(EBIT / (EBIT – Interest))||1.066|
Weighted Average cost of capital = Equity / (Equity + Debt)* Cost of Equity + D / (Equity + Debt) * Cost of Debt 8 (1- tax rate)
= Weight of equity = E / (E + D) = 596846.886 / (596846.886 + 69827.5) = 0.8953
= Weight of debt = D / (E + D) = 69827.5 / (596846.886} + 69827.5) = 0.1047
= 0.8953 *11.03 %+.01047*3.1821% * (1-11.675%)
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