Key Financial Reletionship

In reviewing the financial statements of the two companies that were analyzed are Microsoft and Apple Inc., this paper has been supplied with accurate data, which summarizes and compares the companies' two most recent fiscal years. This paper will also discuss the inter-relationships, from the data that has been presented, of each of the statements. Furthermore, this paper will discuss where the key components of the basic accounting equation are illustrated in the company financials.

In addition, this information will describe any control techniques or issues that were discussed in the company's financial statements. In concluding this paper some ideas will be shown as to why reviewing the status of finances helps a company in making the right financial decisions. Moreover, this information will show the diverse accounting strategies that Microsoft and Apple Inc. utilizes in their operations.

Microsoft and Apple Inc. are both very large and successful companies. When the annual financials are compared, Apple Inc. is in much better shape than Microsoft. Microsoft has dropped almost 10% of its total assets since year 2006, while increasing its total liabilities. This is not a good indication because its current ratio as of 2007 is 1.96, where it is slightly under the rule of thumbs, which may also suggest that there may be a minor possibility of liquidity problems. Microsoft's total equity has also dropped nearly 25% since 2006. Apple Inc. on the other had is doing exceptionally well for itself. Its total assets have increased approaching 70% from previous year and at the same time increasing its liabilities (loan) to generate more sales, and increasing its total revenue.

The Return on Assets (ROA) ratio determines the amount of income each dollar of assets generates. Microsoft's ROA is 0.22 and Apple Inc.'s ROA ratio is 0.14 which signifies that each dollar of company's assets produced income of approximately $0.22 for Microsoft and $0.14 for Apple Inc. That means, Microsoft's income for each dollar is higher than Apple Inc.; however, it does not represent that Microsoft generates more sales and income than Apple Inc. Despite the sales, we know for certain that Microsoft is more efficient that Apple Inc. in using its assets to produce more sales, because Microsoft's assets turnover ratio is higher than Apple Inc.

When looking at an organization's financial standing the basic accounting equation becomes very important. This equation is represented as Assets = Liabilities + Owner's Equity. The assets of an organization are described as the resources within an organization. The liabilities of an organization are described as a method of financing resources that requires repayment. Finally to finish the equation the owner's equity of an organization is described as a method of financing resources that does not require repayment and represents ownership in the business (Albrecht, & Stice, & Stice, & Swan, 2005).

In the case of Apple and Microsoft, who both share a competitive interest in a common marketplace, these key components of the basic accounting equation are illustrated in a similar fashion. The assets of these organizations can be illustrated as cash, computer or electronic inventory, and equipment used to create the products for future sale. When looking at the liabilities of these organizations they can be illustrated as notes payable such as building and plant expenses as well as accounts payable.

The third component of this equation, owner's equity, regarding these two organizations can be illustrated as the capital stock, which is the total stock, authorized or issued by the corporation. These three key components become important and key to the representation of an organization's fanatical standing and must be properly accounted for to maintain legitimacy and integrity within the industry.

When it comes to control techniques of Apple and Microsoft's financial statements, both companies do an excellent job of keeping everything in order. Microsoft uses an internal committee that oversees all aspects of the accounting and financial procedures. The committee in responsible for auditing the financial statements and any other records that are pertinent in the accounting cycle. Microsoft also uses an external auditing firm called Deloitte & Touche LLP, which does similar financial and accounting duties, as well as making sure that everything is correct and legitimate. Apple uses a similar approach with their own internal audit committee, as well as using an external public accounting firm by the name of KPMG LLP. Using both internal and external accounting, financial and audit functions, is essential in keeping accurate books and ensuring that everything is legitimate and validated.

Both companies' keep tight control over the accuracy of their own respective accounting department's and practices. Apple uses three financial statements, which are the annual balance sheets, annual income statements, and annual cash flow statements (Apple Inc., 2008). Microsoft uses four financial statements', which are the income statement, balance sheet, and cash flow statement and segment revenue/operating income. In addition, Apple also uses the Dupont framework to further maintain control over the return on equity.

The Dupont framework turns the return on equity into 3 ratios, which are return on sales, asset turnover and assets-to-equity ratio (Albrecht, Stice & Swain, 2005). The Dupont framework can analyze Apple's return on investment from year to year and see if it is higher or lower over a period of time. All the controls are important for both Apple and Microsoft, to ensure a smooth and accurate financial report of both company's status. Additional controls, like the Dupont framework, add valuable input for the company to further evaluate its financial status and make the best possible decisions.

In summing up the research on these very prominent and successful companies, it is plain to see the importance of financial statements and how they give a company a snapshot of how their business is doing. Being able to see the status of finances helps a company with making the right financial decisions. In comparison of management of finances, Microsoft and Apple both exercise the use of the key components of basic accounting. Apple uses annual balance sheets, annual income statements and annual cash flow statements. On the other hand Microsoft uses income statements, balance sheets, cash flow statements and segment revenue/operating income.

Additionally, there are also a few distinguished differences in their accounting methods as well. One of the differences demonstrated by Microsoft is that it has four financial statements compared to Apple just having three. On the same token, Apple uses the DuPont Framework and Microsoft does not. As far as the accurate accounting and reporting for finances goes, they both have internal and external organizations for auditing their books. By these companies using both internal and external organizations for auditing their records, they make sure that everything is legitimate and accurate. The financial auditing methods of Microsoft and Apple are indeed a vital part of their operations. Poor management of funds and substandard book keeping can adversely affect the success of a company in any business.

References

Albrecht, S., & Stice, J., & Stice, E., & Swain, M. (2005). Accounting: Concepts and Applications, 9th edition. Mason OH: Thomson Corporation.

Apple Inc. (2008). Market Watch. Retrieved April 4, 2008, from http://www.marketwatch.com/tools/quotes/financials.asp?symb=AAPL&sid=609&report=1&freq=1