Annual Report Project - Section 4

Annual Report Project 3: Vertical and Horizontal Analysis

Lakisha Trammel

Dr. E. Gregory

GCUGUC

ACC-616-0500 Financial Research and Compliance

September 2, 2020

Introduction

The objective of this report is to analyze the income statement and balance sheet of Microsoft both horizontally and vertically in the last three years. The years featured in this report are 2018-2020, with year ending date of June 30, 2020?

Vertical and Horizontal Analysis of Income Statement Comment by Elaine Gregory: If you reviewed my Loom Presentation, we are looking for more depth in the overview of the company, the use of these ratio analysis, etc.

Vertical income statement of Microsoft shows that the company has improved its profitability from 2018 to 2020 through increased expense control. The revenue cost of 34.8% in 2018 was reduced to 34.1% in 2019. A further decline to revenue costs continued to 32.2% as noted in the financial year ending on June 30, 2020. As a result, the gross profit increased from 65.2% in 2018 to 67.8% in 2020. Comment by Elaine Gregory: What is revenue cost? I am not sure what you mean?

Throughout this same period, the company increasingly controlled selling, general and administrative expenses. As a result, the ratio of SG&A expenses decreased from 20.1% in 2018 to 18.4% in 2019. A further decline to 17.3% in 2020 defined a continued advance in expense control. Comment by Elaine Gregory: Why did this happen?

The company increased its research and development expense which is necessary for the survival and prosperity of the company. As a result, total operating profit increased from 31.8% in 2018 to 37% in 2020. Non-operating expenses also slowly declined from 1.3% in 2018 to 0.1% in 2020. As a result of the company’s efforts, the pretax income as a result increased from 33.1% in 2018 to 34.7% in 2019 and 37.1% in 2020. Comment by Elaine Gregory: Based on what evidence?

Income tax expense declined as a large percentage of revenue from 18% in 2018 to just 6.1% in 2020. As a result, the net income doubled increasing from 15% in 2018 to more than 31% in 2020.

Microsoft revenue increased from 14% in 2019 compared to 2018, subsequently increasing to 13.6% in 2020. Sales costs increased at a lower rate compared to an increase of 11.9% in 2019 and 7.4% in 2020.

As a result of the cost-saving efforts implemented by Microsoft, the gross profit in both 2019 and 2020 increased more than the percentage increase in revenue. The selling, general and administrative expenses also increased at a lower rate as compared to the increase in revenue. However, non-operating income decreased significantly in the last two years as compared to 2018, which may be due to lower interest earnings. The income tax declined in 2018 by some 78%, however, it almost doubled in 2020 as compared to the preceding year. As a result, the net income increased by 136.8% in 2019 and a further 12.8% in 2020.

Vertical and Horizontal Analysis of Balance Sheet

The share of cash and cash equivalents has declined in the last three years from 51.7% to 45.3% in 2020. Inventories showed a decline; however, receivables and other current assets slightly increased in the last three years. As a result, total current assets decreased from 65.5% in 2018 to 60.4% in 2020. The decline in current assets will prove beneficial if corresponding liabilities also decrease. Currently liabilities saw a minor increase in the last three years.

Total non-current assets hand increased. Considering the decrease in net value due to depreciation, the increase in property plant and equipment a significant growth. Both property plant and equipment and intangible assets increased. The decrease in current assets, particularly cash assets justifies the company the use of some of its internal resources to finance acquisitions. The long term investments gradually increased during the last three years.

Current liabilities increased. The particular increase occurred in provisions and differed current liabilities, particularly in 2020.

Noncurrent liabilities show a consistent decline in the last three years and reached to 60.7% from 68% of the total assets.

The particular decrease occurred in long term debt which decreased from 27.9% to 19.8%. Payables and accrued liabilities also slightly declined during this time period, from 1.5% of the total assets to 1.1% of the total assets. As a result, total noncurrent liabilities declined from 45.4% to 37.7%.

Equity because of issuing new shares and retained earnings. However, the share of retained earnings doubled in 2020 to 11.5% from just 5.3% in 2018. Comment by Elaine Gregory: What does this mean? Your sentences are choppy and incomplete which does not allow me to assess what you understand.

Overall total current assets increased in cash and cash equivalents, receivables, and other current assets.

The horizontal analysis of the balance sheet shows that the cash and cash equivalents have slightly increased in 2020 as compared to the stagnant figures of 2019.

Total non-current assets also increased with a major increase in net property plant and equipment. Total long-term investments also increased. However, other non-current assets decreased by 11% in 2020 as compared to an increase by nearly 98% in 2019.

Total current liabilities increased in the last three years from 18.7% in 2019 and to a further 4.2% in 2020. The major increase came from provisions as well as from deferent and other current liabilities.

Long-term liabilities declined due to a major increase in payment of long-term debt. Other non-current liabilities increased significantly in the last three years.

Total equity also increased with major changes coming from retained earnings and an issue of new equity.

References

Microsoft, (2020). Annual Report 2020- Satya Nadella, Chief Executive Officer. Retrieved from https://microsoft.gcs-web.com/static-files/4e7064ed-bbf7-4140-a8cb-79aba77421b9

Microsoft, (2019). Annual Report 2019- Satya Nadella, Chief Executive Officer. Retrieved from https://www.microsoft.com/investor/reports/ar19/index.html Comment by Elaine Gregory: You need to use the SEC Form 10K from US Securities and Exchange Commission as I provided in your Loom Presentations.

Nadella, S., & London, S. (2018). Microsoft’s nNext aAct. The McKinsey Quarterly.Missing information in this reference.

Appendix

Total Current Assets18191517555216966260.4%61.3%65.5%

Deferred Costs/Assets, Current

Total Non-Current Assets1193961110048918639.6%38.7%34.5%

Net Property, Plant and Equipment52904438563614617.6%15.3%14.0%

Net Intangible Assets50389497764373616.7%17.4%16.9%

Total Long Term Investments2965264918621.0%0.9%0.7%

Other Non-Current Assets131381472374424.4%5.1%2.9%

Total Assets301311286556258848100.0%100.0%100.0%

Financial Liabilities, Current3749551639981.2%1.9%1.5%

Provisions, Current7874683061032.6%2.4%2.4%

Deferred Liabilities, Current36000326762890511.9%11.4%11.2%

Other Current Liabilities10027935187443.3%3.3%3.4%

Total Current Liabilities72310694205848824.0%24.2%22.6%

Long Term Debt59578666627224219.8%23.3%27.9%

Capital Lease Obligations, Non-Current7671618855682.5%2.2%2.2%

Tax Liabilities, Non-Current2042335410.1%0.1%0.2%

Deferred Income/Customer

Advances/Billings in Excess of Cost, Non-Current3180453038151.1%1.6%1.5%

Payables and Accrued Expenses, Non-Current2943229612302659.8%10.3%11.7%

Other Non-Current Liabilities10632758152113.5%2.6%2.0%

Total Non-Current Liabilities11069711480611764236.7%40.1%45.4%

Total Liabilities18300718422617613060.7%64.3%68.0%

Equity Attributable to Parent Stockholders1183041023308271839.3%35.7%32.0%

Paid in Capital80552785207122326.7%27.4%27.5%

Retained Earnings/Accumulated Deficit34566241501368211.5%8.4%5.3%

Reserves/Accumulated Comprehensive Income/Losses3186-340-21871.1%-0.1%-0.8%

Total Equity1183041023308271839.3%35.7%32.0%

Total Equity and Liabiltiies

301311286556258848100.0%100.0%100.0%

MSFT_BalanceSheet_Annua Horizontal

202020192018202020192018

Cash, Cash Equivalents and Short Term Investments136527133819133768102.0%100.0%100.0%

Inventories18952063266291.9%77.5%100.0%

Trade and Other Receivables, Current320112952426481108.4%111.5%100.0%

Other Current Assets11482101466751113.2%150.3%100.0%

Total Current Assets181915175552169662103.6%103.5%100.0%

Deferred Costs/Assets, Current

Net Property, Plant and Equipment529044385636146120.6%121.3%100.0%

Net Intangible Assets503894977643736101.2%113.8%100.0%

Total Long Term Investments296526491862111.9%142.3%100.0%

Other Non-Current Assets1313814723744289.2%197.8%100.0%

Total Non-Current Assets11939611100489186107.6%124.5%100.0%

Total Assets301311286556258848105.1%110.7%100.0%

Financial Liabilities, Current37495516399868.0%138.0%100.0%

Provisions, Current787468306103115.3%111.9%100.0%

Deferred Liabilities, Current360003267628905110.2%113.0%100.0%

Other Current Liabilities1002793518744107.2%106.9%100.0%

Total Current Liabilities723106942058488104.2%118.7%100.0%

Long Term Debt59578666627224289.4%92.3%100.0%

Capital Lease Obligations, Non-Current767161885568124.0%111.1%100.0%

Tax Liabilities, Non-Current20423354187.6%43.1%100.0%

Deferred Income/Customer Advances/Billings in Excess of Cost, Non-Current31804530381570.2%118.7%100.0%

Payables and Accrued Expenses, Non-Current29432296123026599.4%97.8%100.0%

Other Non-Current Liabilities1063275815211140.2%145.5%100.0%

Total Non-Current Liabilities11069711480611764296.4%97.6%100.0%

Total Liabilities18300718422617613099.3%104.6%100.0%

Equity Attributable to Parent Stockholders11830410233082718115.6%123.7%100.0%

Paid in Capital805527852071223102.6%110.2%100.0%

Retained Earnings/Accumulated Deficit345662415013682143.1%176.5%100.0%

Reserves/Accumulated Comprehensive Income/Losses3186-340-2187-937.1%15.5%100.0%

Total Equity11830410233082718115.6%123.7%100.0%

Total Equity and Liabiltiies

301311286556258848105.1%110.7%100.0%

MSFT_Income Statement Verical

202020192018202020192018

Total Revenue143,015 125,843 110,360 100.0%100.0%100.0%

Cost of Revenue46,078 42,910 38,353 32.2%34.1%34.8%

Gross Profit96,937 82,933 72,007 67.8%65.9%65.2%

Selling, General and Administrative Expenses24,709 23,098 22,223 17.3%18.4%20.1%

Research and Development Expenses19,269 16,876 14,726 13.5%13.4%13.3%

Operating Income/Expenses43,978 39,974 36,949 30.8%31.8%33.5%

Total Operating Profit/Loss52,959 42,959 35,058 37.0%34.1%31.8%

Non-Operating Income/Expenses, Total77 729 1,416 0.1%0.6%1.3%

Pretax Income53,036 43,688 36,474 37.1%34.7%33.1%

Provision for Income Tax8,755 4,448 19,903 6.1%3.5%18.0%

Net Income from Continuing Operations44,281 39,240 16,571 31.0%31.2%15.0%

MSFT_IncomeStatement_Horizontal

202020192018202020192018

Total Revenue143,015 125,843 110,360 113.6%114.0%100.0%

Cost of Revenue46,078 42,910 38,353 107.4%111.9%100.0%

Gross Profit96,937 82,933 72,007 116.9%115.2%100.0%

Selling, General and Administrative Expenses24,709 23,098 22,223 107.0%103.9%100.0%

Research and Development Expenses19,269 16,876 14,726 114.2%114.6%100.0%

Operating Income/Expenses43,978 39,974 36,949 110.0%108.2%100.0%

Total Operating Profit/Loss52,959 42,959 35,058 123.3%122.5%100.0%

Non-Operating Income/Expenses, Total77 729 1,416 10.6%51.5%100.0%

Pretax Income53,036 43,688 36,474 121.4%119.8%100.0%

Provision for Income Tax8,755 4,448 19,903 196.8%22.3%100.0%

Net Income from Continuing Operations44,281 39,240 16,571 112.8%236.8%100.0%