Key Financial Relationships

Introduction

This Paper will compare and contrast the three major financial statements between eBay and Microsoft it will also give a brief detail of each statement of how and why they are beneficiary to each other. In addition, this paper will give the three key components of the basic accounting equations and how they are interpreted on each company financial statement as well as how and why they affect their company’s end of the fiscal year earning. Finally, this paper will discuss why control techniques are needed and why some issues occur why implementing the control techniques and the outcome of each issue.

Key Financial Relationships

Inter-relationships

The three major financial statements are all ties in together, along with the statement of retained earnings. The balance sheet for the previous affects both the statement of cash flows, and the statement of retained earnings. The retained earnings affect both the income statement and the balance sheet. While the statement of cash flows affects the current year’s balance sheet (Brealey, Myers, & Marcus, 2007). EBay’s financial statements are no different in this matter. In eBay’s 2006 annual report one can see this. The fund received from eBay’s customers and accounts receivable, customer paying with credit, on the balance sheet would affect the net revenues on the income statements. Accounts receivable is on eBay’s statement of cash flows and balance sheet as is accounts payable. If a mistake is on either of accounts receivable or the accounts payable then both financial statements are wrong and need to be corrected. The end of cash at the end of the accounting period on the statement of cash flows affects the cash portion of current assets on the balance sheet (eBay, 2007).

In taking a look at the financial statement online for Microsoft, MSN (2008) offers the ability to take a look across the board of four years worth of information about Microsoft. The first information available for the public to view is the Income Statement. In the income statement the information given is the period dates which all end the last day of June. The length of time is a 12 month period. Other information provided on the income statements for the last four years starting from 2007 are as follows; total revenues, gross profits (which entails selling/generating/administrative expenses/research development and unusual expenses), operating income, income before tax, income after tax and net income before extra. MSN (2008) also offers the opportunity for you to see their balance sheet, cash flow and their ten year summary.

Key Components of the Basic Accounting Equation

The basic accounting equation is that liabilities along with the owners’ equity needs to equal assets. The total of assets is on eBay’s consolidated balance sheet. They have their property and equipment, long-term investments, goodwill, current assets, intangible assets, along with other assets under their assets and the total for 2006 in thousands is $13,494,011. Under liabilities eBay lists their current liabilities along with their other liabilities and their deferred tax liabilities. The total of their liabilities in 2006 in thousands is $2,589,379. For eBay’s stockholders’ equity the company has their retained earnings, additional paid-in capital, common stock, what their treasury stock is at cost, unearned stock based compensation, and their accumulated other comprehensive income. EBay’s 2006 total liability in thousands is $10,904,632. $2,589,379 plus $10,904,632 equals $13,494,011. $13,494,011 is the amount of the assets, which means that eBay’s liabilities plus their stockholder’s equity equals assets. This means that eBay has the basic key component of accounting. If they did not equal each other it would mean there was a mistake in the liabilities, assets, or stockholders’ equity and would have to figure out where the problem was (eBay, 2006).

The key components that is seen on the balance sheet is the total liabilities and the shareholders equity, which for Microsoft in the year 2007 balance sheet statement equals out to $63,171.00. The balance sheet plainly shows the total current assets which for 2007 is $40,168.00 (MSN, 2008). This information comes off the cash and short term investments ($23,411.00) the total receivables net ($11,388.00) total inventory ($1,127.00) and also other current assets ($4,292.00). Other information provided for the liabilities and shareholders equity is the accounts payable ($3,247.00) the accrued expenses ($2,325.00) and the current liabilities is ($18,182.00). This reflects all the money and it shows the customers just where exactly the breakdown is.