Case study

Case study


Microsoft is the leading and the largest Software Company in the world. Found by William Gates and Paul Allen in 1975 Microsoft has grown and become a multibillion company in only ten years. It all started with a great vision, a computer on every desk and every home that seemed almost impossible at the time. Now Microsoft has over 44,000 employees in 60 countries, net income of $3.45 billion and revenue of 11.36 billion. Company dramatic growth and success was driven by development and marketing of operational systems and personal productivity applications software.

1. What are the factors that likely explain the difference between Microsoft’s market value of equity and its reported book value of equity?

The name of Microsoft is very well known to everyone. The company started its business on April 4, 1975. Its founders were Bill Gates and Paul Allen opened this company to sell basic interpreter and Altair 8800. The company advanced to the height in the industry of modern computer software and design in no time. In June 1999, after a conference call with the company’s analysts, The Microsoft Corporation declared that the company was in trouble as they were investigated by the Securities and Exchange Commission (SEC) over some ambiguous accounting practices by the management. As stated, the investigation was most concerned over the deferral of revenues and other undisclosed reserves accounts shown in the Income Statement and Balance Sheet of the company.
It is observed that the factors which are responsible for the difference between the market value of the equity and the book value of the equity were the non recording of the intangible assets correctly. For example human capital, brand value, goodwill of the company and customer loyalty. That was the most obvious reason behind the problem. Since, these type of intangibles were the reason behind the tremendous...

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