Working Captial Paper

Working Capital and Financial Environment Paper

For every company that exists that offers a service or product to the public there is a focus on accurately measuring its current assets and liabilities in the most honest financial regulated environment possible. Brealey states that one of the most "useful summary measure[s] of current assets or liabilities" is net working capital (or just working capital). This paper will give an overview of the working capital elements for both Apple Inc. and the Microsoft Corporation for the 2006 fiscal year. Additionally, it will discuss the financial environment of both companies as it relates to regulatory bodies, the importance of control programs, effective internal control techniques, and the impact of the 2002 Sarbanes-Oxley Act.

Elements of Working Capital

The working capital of a company can be better termed as the short term financial state that a company is in. Working capital is described as the current assets and current liabilities of a company and the optimal state is to have current assets that are higher than its current liabilities. When this is not the case the company could be in jeopardy when it comes to paying its short-term debts to its creditors. Apple Inc and the Microsoft Corporation both manufacture similar products that and therefore have assets and liabilities on their respective balance sheets that are very similar. When looking at their balance sheets there are assets such as cash, short-term investments, inventories, and accounts receivable. Their liabilities include accounts such as accounts payable, accrued compensation, income taxes, and short / current long-term debt. The current assets for Apple in fiscal year 2006 are $14.5 million while Apple's current liabilities for 2006 were $6.4 million (Apple 2006 Annual Report). Applying the standard working capital formula of total current assets minus the total current liabilities Apple had a working capital of $8.0 million. Microsoft on the other hand had total current assets for 2006 of $4.9 million and for the same fiscal year current liabilities of $22.4 million (Microsoft 2006 Annual Report). Applying the standard working capital formula Microsoft has a working capital of $26.6 million. Although both companies have a positive working capital, Microsoft seems to be the stronger of the two with a higher working capital by approximately three times that of Apple. However, when taking a closer look one will see that both companies have total current assets that are twice that of its current liabilities which in essence means that both companies in relation to their size are financially sound. Table 1 and Table 2, below both illustrate the total current assets and total current liabilities of each company.

Table 1. Microsoft Current Assets and Current Liabilities

BALANCE SHEETS

June 30 2006)

Assets

Current assets:

Cash and equivalents $ 6,714)

Short-term investments (including securities pledged as collateral of $3,065 and $-) 27,447)

Total cash and short-term investments 34,161)

Accounts receivable, net of allowance for doubtful accounts of $142 and $171 9,316)

Inventories, net 1,478)

Deferred income taxes 1,940)

Other 2,115)

Total current assets

Accounts payable $ 2,909)

Accrued compensation 1,938)

Income taxes 1,557)

Short-term unearned revenue 9,138)

Securities lending payable 3,117)

Other 3,783)

Total current liabilities 22,442

(Microsoft Annual Report 2006)

Table 2. Apple Current Assets and Current Liabilities

PERIOD ENDING 30-Sep-06

Cash And Cash Equivalents 6,392,000

Short Term Investments 3,718,000

Net Receivables 3,452,000

Inventory 270,000

Other Current Assets 677,000

Total Current Assets 14,509,000

Accounts Payable 6,471,000

Short/Current Long Term Debt -

Other Current Liabilities -

Total Current Liabilities 6,471,000

(Apple Annual Report 2006)

Effective Control Programs & Internal Controls

As with any company the importance of a financial environment of integrity with effective financial control measures are an aspect that cannot be overlooked. Both Apple Inc. and the Microsoft Corporation are companies with a profile of such that they need to be extremely careful with good preventative measures and a great auditing system. These two billion dollar corporations can put themselves at great risk by not producing all of the right information in reference to their financial status. Both are constantly under the watchful eye of the public, their shareholders, and the government being endlessly scrutinized on their business practices and how they do business. Unfortunately, neither company has managed to come away unscathed.

2002 Sarbanes Oxley Act

Since the implementation of the 2002 Sarbanes-Oxley Act (SoX), companies have