According to Warren (2008), the net income of a company refers to the revenue collected during the year less all the expenses met by the company towards attaining such income. It can be summarised mathematically as follows:
Net income = summation of all revenues – summation of all expenses (Wood and Sangster, 2008).
Therefore, from the computation of Microsoft income, the above formula was used in the appendix. The change in net income of the company is calculated the following way:
The change in net income
2012’s net income $ 16,978
Less: 2011’s net income {$ 23,150} – 6172
Though the company had an increase in revenue, the expenses increased more than the revenue collected hence the company had a negative change in net income. This proves that, for any company to have a positive change in net income, the revenue should grow at a higher rate than expenses.
As it stands, the company has several reasons for its reduction in net income. This analysis evaluates why there was a reduction in the net income of Microsoft Companydespite there being an increase in revenue. The reduction in net income was caused by the following:
First, there is impairment goodwill. This is one of the expenses that were not included initially. Its inclusion in2012 contributed to the reduction in net income.
Other causes contributed to a small margin. However, they still caused a reduction in the net income and they must be mentioned. The expenses with minor contributions are cost revenue, research and development, and general and administrative expense. Only the sales and marketing expenses had reduced. These are the differences that led to the changes in the total income between the two years.
Total current assets
This is another point to be considered as indicated by the balance sheet. This refers to all the assets that are easily convertible into cash to meet the current obligations that accrue during the normal operations of the company. The company depicts a very stable liquidity position in case the current assets are greater than the current liabilities.
In the year 2012, the company had a current asset of $85,084 which exceeds current liabilities by $52396. This means all the company was able to meet its short-term obligations. The very high level of current assets in 2012 can be attributed to the total cash, cash equivalents, and short-term investment summation since it comprises more than 75 %, with minor contributions from the other items. The current assets cannot be fully explained as above without an additional analysis which is shown below:
Current ratio = current assets/ Current liabilities
Therefore, the current ratio was 2.6:1 in 2012 meaning the company could meet its current obligations 2.6 times.
In the year 2011, the company also had a large number of current assets in comparison to its current liabilities. This implies that the company had consistent stability within its market. The current assets were $ 74,918 exceeding the current liabilities by $ 46144. This means that the company is highly competent in meeting its current liabilities.
The same ratio of 2.6:1 was established in 2011 where the same inference is made. It can, therefore, be concluded that the company has a keen management team that enhances its current ratio.
This discussion was inclusive of the current liabilities since the current assets in all cases were used to meet the current liabilities. It is expected that an accountant should always find their relationship.
References
Warren, C.S. (2008). Survey Accounting. New York (NY): Cengage Learning.
Wood, F., & Sangster, H. (2008).Business Accounting 1. New Jersey: Prentice Hall.