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Technology Stocks : How high will Microsoft fly? -- Ignore unavailable to you. Want to Upgrade?

To: johnd who wrote (5188)	2/19/1998 5:50:00 PM
From: Exacctnt	Read Replies (1) \| Respond to of 74651

Johnd, Concerning Unearned Revenue - I see where you may interpret an additional 8% Revenue (Sales) to Microsoft's reported numbers. However, do you know how they do the accounting when they list Unearned Revenue? The normal accounting for Revenue (Sales) and earnings would be to credit Revenue (Sales) and debit Customer Receivables or Cash (determined by terms of sales). This transaction gets the Revenue (Sales) on the income statement. Then they would credit Inventory and debit Cost of Revenue (COGS) which would provide the cost portion to the income statement. The difference between revenue and cost gives Operating Income. When Unearned Revenue is reported, the transaction for the revenue would be to credit Unearned Income and debit Receivables or Cash, both accounts would appear on the balance sheet as recorded. But what about the cost side? Do they relieve their Inventory account (credit) and offset that amount in the Unearned Revenue account (debit) as well? If so, doesn't the Unearned Revenue account on the balance sheet really reflect Unearned Earnings? Can someone shed some light on what is included in the Unearned Revenue amount on the balance sheet. Is it just gross revenue and if so, where and when is the cost side reported? I have the feeling that your example of why Microsoft's earnings growth is understated is very conservative if you use just 8%. It may be much higher than that. Regards Bob

To: johnd who wrote (5188)	2/20/1998 10:12:00 AM
From: Ed Schultz	Read Replies (2) \| Respond to of 74651

johnd, Although I agree they could have reported an 8% in additional revenue, I disagree in the interpretation. You make it seem like it is no big deal. This is incorrect. First, the 8% additional revenue could easily translate into a rise of 25% in profits (not 8% like you imply). This is a big deal. But more importantly is the growth rate which goes a long way to determining the PE. You claim they had $13B in revenue in the past year with an additional $1B declared as unearned. The year before they had $10B in revenue. So, is the growth rate 30% or 40%? This is a VERY BIG deal. Because of the amount being set aside as unearned income, the profits and growth rate of the company are being grossly underestimated. Ed