PART II

Item 8

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INCOME STATEMENTS

(In millions, except per share amounts)

Year Ended June 30, 2023 2022 2021

Revenue:
Product $ 64,699 $ 72,732 $ 71,074
Service and other 147,216 125,538 97,014
Total revenue 211,915 198,270 168,088
Cost of revenue:
Product 17,804 19,064 18,219
Service and other 48,059 43,586 34,013
Total cost of revenue 65,863 62,650 52,232
Gross margin 146,052 135,620 115,856
Research and development 27,195 24,512 20,716
Sales and marketing 22,759 21,825 20,117
General and administrative 7,575 5,900 5,107
Operating income 88,523 83,383 69,916
Other income, net 788 333 1,186
Income before income taxes 89,311 83,716 71,102
Provision for income taxes 16,950 10,978 9,831
Net income $ 72,361 $ 72,738 $ 61,271

Earnings per share:

Basic $ 9.72 $ 9.70 $ 8.12
Diluted $ 9.68 $ 9.65 $ 8.05

Weighted average shares outstanding:

Basic 7,446 7,496 7,547
Diluted 7,472 7,540 7,608

Refer to accompanying notes.

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Item 8

COMPREHENSIVE INCOME STATEMENTS

(In millions)

Year Ended June 30, 2023 2022 2021

Net income $ 72,361 $ 72,738 $ 61,271

Other comprehensive income (loss), net of tax:

Net change related to derivatives (14 ) 6 19
Net change related to investments (1,444 ) (5,360 ) (2,266 )
Translation adjustments and other (207 ) (1,146 ) 873

Other comprehensive loss (1,665 ) (6,500 ) (1,374 )

Comprehensive income $ 70,696 $ 66,238 $ 59,897

Refer to accompanying notes.

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Item 8

BALANCE SHEETS

(In millions)

June 30, 2023 2022

Assets
Current assets:
Cash and cash equivalents $ 34,704 $ 13,931
Short-term investments 76,558 90,826
Total cash, cash equivalents, and short-term investments 111,262 104,757
Accounts receivable, net of allowance for doubtful accounts of $650 and $633 48,688 44,261
Inventories 2,500 3,742
Other current assets 21,807 16,924
Total current assets 184,257 169,684
Property and equipment, net of accumulated depreciation of $68,251 and $59,660 95,641 74,398
Operating lease right-of-use assets 14,346 13,148
Equity investments 9,879 6,891
Goodwill 67,886 67,524
Intangible assets, net 9,366 11,298
Other long-term assets 30,601 21,897
Total assets $ 411,976 $ 364,840

Liabilities and stockholders’ equity

Current liabilities:
Accounts payable $ 18,095 $ 19,000
Current portion of long-term debt 5,247 2,749
Accrued compensation 11,009 10,661
Short-term income taxes 4,152 4,067
Short-term unearned revenue 50,901 45,538
Other current liabilities 14,745 13,067
Total current liabilities 104,149 95,082
Long-term debt 41,990 47,032
Long-term income taxes 25,560 26,069
Long-term unearned revenue 2,912 2,870
Deferred income taxes 433 230
Operating lease liabilities 12,728 11,489
Other long-term liabilities 17,981 15,526
Total liabilities 205,753 198,298
Commitments and contingencies
Stockholders’ equity:
Common stock and paid-in capital – shares authorized 24,000; outstanding 7,432
and 7,464 93,718 86,939
Retained earnings 118,848 84,281
Accumulated other comprehensive loss (6,343) (4,678)
Total stockholders’ equity 206,223 166,542
Total liabilities and stockholders’ equity $ 411,976 $ 364,840

Refer to accompanying notes.

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Item 8

CASH FLOWS STATEMENTS

(In millions)

Year Ended June 30, 2023 2022 2021

Operations
Net income $ 72,361 $ 72,738 $ 61,271
Adjustments to reconcile net income to net cash from operations:
Depreciation, amortization, and other 13,861 14,460 11,686
Stock-based compensation expense 9,611 7,502 6,118
Net recognized losses (gains) on investments and derivatives 196 (409 ) (1,249 )
Deferred income taxes (6,059 ) (5,702 ) (150 )
Changes in operating assets and liabilities:
Accounts receivable (4,087 ) (6,834 ) (6,481 )
Inventories 1,242 (1,123 ) (737 )
Other current assets (1,991 ) (709 ) (932 )
Other long-term assets (2,833 ) (2,805 ) (3,459 )
Accounts payable (2,721 ) 2,943 2,798
Unearned revenue 5,535 5,109 4,633
Income taxes (358 ) 696 (2,309 )
Other current liabilities 2,272 2,344 4,149
Other long-term liabilities 553 825 1,402

Net cash from operations 87,582 89,035 76,740

Financing
Cash premium on debt exchange 0 0 (1,754 )
Repayments of debt (2,750 ) (9,023 ) (3,750 )
Common stock issued 1,866 1,841 1,693
Common stock repurchased (22,245 ) (32,696 ) (27,385 )
Common stock cash dividends paid (19,800 ) (18,135 ) (16,521 )
Other, net (1,006 ) (863 ) (769 )

Net cash used in financing (43,935 ) (58,876 ) (48,486 )

Investing
Additions to property and equipment (28,107 ) (23,886 ) (20,622 )
Acquisition of companies, net of cash acquired, and purchases of
intangible and other assets (1,670 ) (22,038 ) (8,909 )
Purchases of investments (37,651 ) (26,456 ) (62,924 )
Maturities of investments 33,510 16,451 51,792
Sales of investments 14,354 28,443 14,008
Other, net (3,116 ) (2,825 ) (922 )

Net cash used in investing (22,680 ) (30,311 ) (27,577 )

Effect of foreign exchange rates on cash and cash equivalents (194 ) (141 ) (29 )

Net change in cash and cash equivalents 20,773 (293 ) 648

Cash and cash equivalents, beginning of period 13,931 14,224 13,576

Cash and cash equivalents, end of period $ 34,704 $ 13,931 $ 14,224

Refer to accompanying notes.

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Item 8

STOCKHOLDERS’ EQUITY STATEMENTS

(In millions, except per share amounts)

Year Ended June 30, 2023 2022 2021

Common stock and paid-in capital

Balance, beginning of period $ 86,939 $ 83,111 $ 80,552
Common stock issued 1,866 1,841 1,963
Common stock repurchased (4,696 ) (5,688 ) (5,539 )
Stock-based compensation expense 9,611 7,502 6,118
Other, net (2 ) 173 17

Balance, end of period 93,718 86,939 83,111

Retained earnings
Balance, beginning of period 84,281 57,055 34,566
Net income 72,361 72,738 61,271
Common stock cash dividends (20,226 ) (18,552 ) (16,871 )
Common stock repurchased (17,568 ) (26,960 ) (21,879 )
Cumulative effect of accounting changes 0 0 (32 )

Balance, end of period 118,848 84,281 57,055

Accumulated other comprehensive income (loss)

Balance, beginning of period (4,678 ) 1,822 3,186
Other comprehensive loss (1,665 ) (6,500 ) (1,374 )
Cumulative effect of accounting changes 0 0 10

Balance, end of period (6,343 ) (4,678 ) 1,822

Total stockholders’ equity $ 206,223 $ 166,542 $ 141,988

Cash dividends declared per common share $ 2.72 $ 2.48 $ 2.24

Refer to accompanying notes.

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Item 8

Intangible Assets

Our intangible assets are subject to amortization and are amortized using the straight-line method over their estimated
period of benefit, ranging from one to 20 years. We evaluate the recoverability of intangible assets periodically by
taking into account events or circumstances that may warrant revised estimates of useful lives or that indicate the asset
may be impaired.

NOTE 2 — EARNINGS PER SHARE

Basic earnings per share (“EPS”) is computed based on the weighted average number of shares of common stock
outstanding during the period. Diluted EPS is computed based on the weighted average number of shares of common
stock plus the effect of dilutive potential common shares outstanding during the period using the treasury stock method.
Dilutive potential common shares include outstanding stock options and stock awards.

The components of basic and diluted EPS were as follows:

(In millions, except earnings per share)

Year Ended June 30, 2023 2022 2021

Net income available for common shareholders (A) $ 72,361 $ 72,738 $ 61,271

Weighted average outstanding shares of common stock (B) 7,446 7,496 7,547
Dilutive effect of stock-based awards 26 44 61
Common stock and common stock equivalents (C) 7,472 7,540 7,608
Earnings Per Share

Basic (A/B) $ 9.72 $ 9.70 $ 8.12

Diluted (A/C) $ 9.68 $ 9.65 $ 8.05

Anti-dilutive stock-based awards excluded from the calculations of diluted EPS were immaterial during the periods
presented.

NOTE 3 — OTHER INCOME (EXPENSE), NET

The components of other income (expense), net were as follows:

(In millions)

Year Ended June 30, 2023 2022 2021

Interest and dividends income $ 2,994 $ 2,094 $ 2,131

Interest expense (1,968 ) (2,063 ) (2,346 )
Net recognized gains on investments 260 461 1,232
Net gains (losses) on derivatives (456 ) (52 ) 17
Net gains (losses) on foreign currency remeasurements 181 (75 ) 54
Other, net (223 ) (32 ) 98

Total $ 788 $ 333 $ 1,186

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Item 8

Net Recognized Gains (Losses) on Investments

Net recognized gains (losses) on debt investments were as follows:

(In millions)

Year Ended June 30, 2023 2022 2021

Realized gains from sales of available-for-sale securities $ 36 $ 162 $ 105

Realized losses from sales of available-for-sale securities (124 ) (138 ) (40 )
Impairments and allowance for credit losses (10 ) (81 ) (2 )

Total $ (98 ) $ (57 ) $ 63

Net recognized gains (losses) on equity investments were as follows:

(In millions)

Year Ended June 30, 2023 2022 2021

Net realized gains on investments sold $ 75 $ 29 $ 123

Net unrealized gains on investments still held 303 509 1,057
Impairments of investments (20 ) (20 ) (11 )

Total $ 358 $ 518 $ 1,169

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 NOTE 4 — INVESTMENTS
Investment Components
The components of investments were as follows:
Cash and
Fair Value Adjusted Unrealized Unrealized Recorded Cash Short-term Equity
(In millions) Level Cost Basis Gains Losses Basis Equivalents Investments Investments

June 30, 2023

Changes in Fair Value Recorded in
Other Comprehensive Income
Commercial paper Level 2 $ 16,589 $ 0 $ 0 $ 16,589 $ 12,231 $ 4,358 $ 0
Certificates of deposit Level 2 2,701 0 0 2,701 2,657 44 0
U.S. government securities Level 1 65,237 2 (3,870) 61,369 2,991 58,378 0
U.S. agency securities Level 2 2,703 0 0 2,703 894 1,809 0
Foreign government bonds Level 2 498 1 (24) 475 0 475 0
Mortgage- and asset-
backed securities Level 2 824 1 (39) 786 0 786 0
Corporate notes and bonds Level 2 10,809 8 (583) 10,234 0 10,234 0
Corporate notes and bonds Level 3 120 0 0 120 0 120 0
Municipal securities Level 2 285 1 (18) 268 7 261 0
Municipal securities Level 3 103 0 (16) 87 0 87 0
Total debt investments $ 99,869 $ 13 $ (4,550) $ 95,332 $ 18,780 $ 76,552 $ 0
Changes in Fair Value Recorded in
Net Income
Equity investments Level 1 $ 10,138 $ 7,446 $ 0 $ 2,692
Equity investments Other 7,187 0 0 7,187
Total equity investments $ 17,325 $ 7,446 $ 0 $ 9,879
Cash $ 8,478 $ 8,478 $ 0 $ 0
Derivatives, net (a) 6 0 6 0
Total $ 121,141 $ 34,704 $ 76,558 $ 9,879

(a) Refer to Note 5 – Derivatives for further information on the fair value of our derivative instruments.

Equity investments presented as “Other” in the tables above include investments without readily determinable fair values
measured using the equity method or measured at cost with adjustments for observable changes in price or impairments,
and investments measured at fair value using net asset value as a practical expedient which are not categorized in the fair
value hierarchy. As of June 30, 2023 and 2022, equity investments without readily determinable fair values measured at
cost with adjustments for observable changes in price or impairments were $4.2 billion and $3.8 billion, respectively.

Unrealized Losses on Debt Investments

Debt investments with continuous unrealized losses for less than 12 months and 12 months or greater and their related fair
values were as follows:

Less than 12 Months 12 Months or Greater Total

Unrealized Unrealized Total Unrealized
(In millions) Fair Value Losses Fair Value Losses Fair Value Losses

June 30, 2023

U.S. government and agency securities $ 7,950 $ (336 ) $ 45,273 $ (3,534) $ 53,223 $ (3,870)
Foreign government bonds 77 (5 ) 391 (19) 468 (24)
Mortgage- and asset-backed securities 257 (5 ) 412 (34) 669 (39)
Corporate notes and bonds 2,326 (49 ) 7,336 (534) 9,662 (583)
Municipal securities 111 (3 ) 186 (31) 297 (34)
Total $ 10,721 $ (398 ) $ 53,598 $ (4,152) $ 64,319 $ (4,550)

Less than 12 Months 12 Months or Greater

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Item 8

NOTE 11 — DEBT

The components of debt were as follows:

Maturities Stated Interest Effective Interest June 30, June 30,

(In millions, issuance by calendar year) (calendar year) Rate Rate 2023 2022

2009 issuance of $3.8 billion 2039 5.20% 5.24% $ 520 $ 520

2010 issuance of $4.8 billion 2040 4.50% 4.57% 486 486
2011 issuance of $2.3 billion 2041 5.30% 5.36% 718 718
2012 issuance of $2.3 billion 2042 3.50% 3.57% 454 1,204
2013 issuance of $5.2 billion 2023 – 2043 3.63% – 4.88% 3.73% – 4.92% 1,814 2,814
2013 issuance of €4.1 billion 2028 – 2033 2.63% – 3.13% 2.69% – 3.22% 2,509 2,404
2015 issuance of $23.8 billion 2025 – 2055 2.70% – 4.75% 2.77% – 4.78% 9,805 10,805
2016 issuance of $19.8 billion 2023 – 2056 2.00% – 3.95% 2.10% – 4.03% 9,430 9,430
2017 issuance of $17.0 billion 2024 – 2057 2.88% – 4.50% 3.04% – 4.53% 8,945 8,945
2020 issuance of $10.0 billion 2050 – 2060 2.53% – 2.68% 2.53% – 2.68% 10,000 10,000
2021 issuance of $8.2 billion 2052 – 2062 2.92% – 3.04% 2.92% – 3.04% 8,185 8,185
Total face value 52,866 55,511
Unamortized discount and
issuance costs (438) (471)
Hedge fair value adjustments (a) (106) (68)
Premium on debt exchange (5,085) (5,191)
Total debt 47,237 49,781
Current portion of long-term debt (5,247) (2,749)
Long-term debt $ 41,990 $ 47,032

(a) Refer to Note 5 – Derivatives for further information on the interest rate swaps related to fixed-rate debt.

As of June 30, 2023 and 2022, the estimated fair value of long-term debt, including the current portion, was $46.2
billion and $50.9 billion, respectively. The estimated fair values are based on Level 2 inputs.

Debt in the table above is comprised of senior unsecured obligations and ranks equally with our other outstanding
obligations. Interest is paid semi-annually, except for the Euro-denominated debt, which is paid annually. Cash paid
for interest on our debt for fiscal years 2023, 2022, and 2021 was $1.7 billion, $1.9 billion, and $2.0 billion, respectively.

The following table outlines maturities of our long-term debt, including the current portion, as of June 30, 2023:
(In millions)

Year Ending June 30,

2024 $ 5,250
2025 2,250
2026 3,000
2027 8,000
2028 0
Thereafter 34,366
Total $ 52,866

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 NOTE 16 — STOCKHOLDERS’ EQUITY

Shares Outstanding

Shares of common stock outstanding were as follows:

(In millions)

Year Ended June 30, 2023 2022 2021

Balance, beginning of year 7,464 7,519 7,571
Issued 37 40 49
Repurchased (69) (95) (101)
Balance, end of year 7,432 7,464 7,519

Dividends

Our Board of Directors declared the following dividends:

Dividend
Declaration Date Record Date Payment Date Per Share Amount

Fiscal Year 2023 (In millions)

September 20, 2022 November 17, 2022 December 8, 2022 $ 0.68 $ 5,066
November 29, 2022 February 16, 2023 March 9, 2023 0.68 5,059
March 14, 2023 May 18, 2023 June 8, 2023 0.68 5,054
June 13, 2023 August 17, 2023 September 14, 2023 0.68 5,054

Total $ 2.72 $ 20,233

Fiscal Year 2022

September 14, 2021 November 18, 2021 December 9, 2021 $ 0.62 $ 4,652
December 7, 2021 February 17, 2022 March 10, 2022 0.62 4,645
March 14, 2022 May 19, 2022 June 9, 2022 0.62 4,632
June 14, 2022 August 18, 2022 September 8, 2022 0.62 4,621

Total $ 2.48 $ 18,550

The dividend declared on June 13, 2023 was included in other current liabilities as of June 30, 2023.

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Item 8

NOTE 17 — ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)

The following table summarizes the changes in accumulated other comprehensive income (loss) by component:

(In millions)

Year Ended June 30, 2023 2022 2021

Derivatives

Balance, beginning of period $ (13) $ (19) $ (38)

Unrealized gains (losses), net of tax of $9, $(15), and $9 34 (57) 34
Reclassification adjustments for (gains) losses included in other income
(expense), net (61) 79 (17)
Tax expense (benefit) included in provision for income taxes 13 (16) 2
Amounts reclassified from accumulated other comprehensive income
(loss) (48) 63 (15)
Net change related to derivatives, net of tax of $(4), $1, and $7 (14) 6 19
Balance, end of period $ (27) $ (13) $ (19)
Investments
Balance, beginning of period $ (2,138) $ 3,222 $ 5,478
Unrealized losses, net of tax of $(393), $(1,440), and $(589) (1,523) (5,405) (2,216)
Reclassification adjustments for (gains) losses included in other income
(expense), net 99 57 (63)
Tax expense (benefit) included in provision for income taxes (20) (12) 13
Amounts reclassified from accumulated other comprehensive income
(loss) 79 45 (50)
Net change related to investments, net of tax of $(373), $(1,428), and $(602) (1,444) (5,360) (2,266)
Cumulative effect of accounting changes 0 0 10
Balance, end of period $ (3,582) $ (2,138) $ 3,222
Translation Adjustments and Other

Balance, beginning of period $ (2,527) $ (1,381) $ (2,254)

Translation adjustments and other, net of tax of $0, $0, and $(9) (207) (1,146) 873
Balance, end of period $ (2,734) $ (2,527) $ (1,381)
Accumulated other comprehensive income (loss), end of period $ (6,343) $ (4,678) $ 1,822

NOTE 18 — EMPLOYEE STOCK AND SAVINGS PLANS

We grant stock-based compensation to employees and directors. Awards that expire or are canceled without delivery
of shares generally become available for issuance under the plans. We issue new shares of Microsoft common stock
to satisfy vesting of awards granted under our stock plans. We also have an ESPP for all eligible employees.

Stock-based compensation expense and related income tax benefits were as follows:
(In millions)

Year Ended June 30, 2023 2022 2021

Stock-based compensation expense $ 9,611 $ 7,502 $ 6,118

Income tax benefits related to stock-based compensation 1,651 1,293 1,065

87