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NOTE session-05

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Before we begin: Who was the first baseball player to earn more than one million dollars a year? Think about your answer before the next slide.

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The answer to our trivia question is Nolan Ryan. In 1979, he signed a four-year, 4.5 million dollar contract with the Houston Astros, making him baseball’s first million-dollar-a-year player.

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That was more than four times his earlier annual pay with the Angels. Welcome to Lecture 5. Today we will use Microsoft’s annual report to find a number, read its context, and decide what it supports.

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Chapters One through Three followed transactions into accounting records and then into financial statements. Chapter Four asked which accounting requirements govern that work.

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Today we read the finished reports from the outside. We can inspect the published statements and notes, but we cannot see every transaction or internal record behind them.

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The published statements and their notes are available to an outside reader. The journals and ledgers behind them usually are not.

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Our task is to understand a reported number using the filing that a reader can inspect, without pretending we can see every internal record.

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What amount of current accounts receivable did Microsoft report at June 30, 2025? Is the allowance already deducted? Before we search, notice that this is a question about a reported balance.

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Whether every customer eventually pays is a separate question, which the note will help us discuss.

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The objective is to interpret reported financial information using relevant context from the company's public filings. Finding an amount is part of that work, but the amount alone is not an interpretation.

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The entity, heading, reporting period, units, statement, notes, and other relevant filing sections can change what the information means.

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The relevant context depends on the question. A statement or note amount can answer what was reported. An accounting policy can explain how an amount was measured.

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Comparative amounts, notes, and management's discussion can help explain a change. No single filing location answers every question about an account.

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These are the two questions that will guide our Microsoft search: what current accounts receivable balance did the company report at June 30, 2025, and does that amount come before or after the allowance?

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Both questions depend on the complete balance-sheet row. Before opening the statements, choose the filing that fits the date. Then we will inspect the related allowance disclosure without calculating the estimate.

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Start with the question, then choose the document. For a complete year, begin with the annual Form 10 K. For a period within the year, consider Form 10 Q.

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Its interim financial statements receive a review, which provides less assurance than an audit. Form 8 K reports certain events and other current information.

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An earnings release attached to that form is not a substitute for reading the annual statement set. In each case, distinguish the reporting period from the date the document was filed.

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Choose the filing that contains the June 30, 2025 balance. Compare the form and reporting period for all three entries. Make your choice now. The next screen explains the alternatives.

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Choose C. Its reporting period ends on June 30, 2025, the year-end date in our question. Choice A covers the prior year. Choice B ends in March, before the year-end balance we need.

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The correct annual report was filed a month after its reporting date. That delay does not move the balance date to July. We can now open the report, confirm the company on its cover, and follow its contents.

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Watch one route to the annual report. Open Microsoft's EDGAR page, select annual and quarterly reports, and use the reporting date to find the 2025 Form 10-K.

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The filing row shows June 30 as the reporting date and July 30 as the filing date. Open the complete HTML report and check Microsoft on its cover. The recording ends there.

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Afterward, we will use the report's own map to find the statements.

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The cover confirms that this is Microsoft Corporation's annual report for the year ended June 30, 2025. It was filed July 30. Those dates serve different purposes. We have the right document; now we need its structure.

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Before opening a statement, look at the annual report's four parts. Part Two contains Item Seven, management's discussion, and Item Eight, the audited financial statements and notes.

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Our receivables question takes us to Item Eight. This map will also help with a different question later.

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Follow the report's contents into Item Eight and the consolidated balance sheets. The contents page is a route, not evidence of the amount itself. The next screen shows the row to inspect.

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We have reached the financial statements. Now read the current-assets row with its date column and unit heading. The next question asks whether the reported number is gross or net.

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The balance sheet shows accounts receivable, net of an allowance. Look at the complete row label, the 2025 column, and the dollars-in-millions heading. Before we discuss the number, decide what the word net means here.

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The balance sheet says accounts receivable, net of allowance. Is the amount before or after that allowance? Choose first; then compare the relationship on the next slide.

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The balance sheet reports accounts receivable net of the related allowance. Gross receivables come before that deduction. The allowance is deducted to reach the reported net balance. All three are balances at one date.

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When a row says net of allowance, do not subtract the allowance from the displayed amount a second time.

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Now read the actual 2025 amount. Microsoft reports 69,905 million dollars of current accounts receivable, net. The row label also reports a 944 million dollar allowance.

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The allowance has already been deducted from the reported net balance.

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The highlighted number is the net balance we set out to find. The allowance is shown in the row label so we can understand that number. What the allowance estimates is a different question, answered by the related note.

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Note One calls the allowance Microsoft's best estimate of credit losses. It points to troubled accounts, experience, and other available evidence.

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The note explains the estimate's meaning and inputs; it does not tell us which individual customers will fail to pay. We can now ask what the auditor's opinion covers.

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The auditor's report addresses the financial statements and notes as a whole. It gives reasonable assurance about fair presentation in all material respects. It does not promise collection of each receivable.

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Keep that scope in mind as we bring the three sources together.

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The balance sheet answers what net amount Microsoft reported. Note One explains the allowance as an estimate. The auditor's opinion addresses the statements as a whole.

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Use the right source for the question, then test a proposed conclusion about the opinion.

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Choose which conclusion the financial statement opinion supports. Consider its subject, materiality threshold, and level of assurance. Pause to answer; the next slide explains each choice.

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The opinion concerns the financial statements as a whole, in all material respects, under US GAAP. It does not establish exactness for every account or future collection of every receivable.

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We have now checked a known answer ourselves. Next we ask how an AI assistant could help when the answer is harder to locate.

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In 2023, Jillian Bommarito and her coauthors tested GPT models on CPA-style questions. Even the strongest model they tested answered only 14.4 percent of a sample Regulation exam section correctly.

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That result came from an exam task, not today's filing search. It shows how much the starting point has changed.

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On the paper's separate CPA Blueprint assessment, results varied across subjects. Solid bars count the first answer; the hatched area also counts a second choice. These questions did not test analysis or evaluation.

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The chart is useful history, but it cannot tell us whether a model can interpret this filing.

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The 2023 results already showed rapid improvement across model versions. Now even a weaker current model can return the right answer to a filing lookup in under ten seconds.

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Finding an answer is no longer enough of an exercise. We need to see which passage it used, what that passage includes, and whether the answer says more than the filing does. That is what the next task tests.

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We already knew where to find net receivables. The next question is different. We know the business activity but not the filing heading.

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AI can help locate candidate passages; we still decide what those passages establish.

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Microsoft is expanding datacenters. What had it already agreed to pay for future capacity at June 30, 2025? That ordinary question could point to purchases, construction, or leases.

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We will ask an assistant to find and explain the relevant categories. The filing does not report one number called future datacenter capacity.

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The book Agentic AI in Law and Finance frames system design with ten questions.

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The first six ask when work begins, what a request means, what sources the system can inspect, what actions it may take, what it remembers, and how it plans the steps.

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For today's short task, the key starting choices are the exact filing, the meaning of future capacity, and the passages to inspect. A chat is not automatically a complete agent.

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The remaining questions ask when work is complete, when to seek help, whether to delegate, and how the system is governed. Here we need no other agent. We stop when the answer names the categories, locations, and limits.

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If someone demands a datacenter-only total that the filing does not give, the right response is to flag that gap for a person.

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Here is the live task. Give an assistant Microsoft's 2025 Form 10-K and ask about future datacenter capacity in ordinary words.

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Require categories, amounts, units, locations, and a warning if a row covers more than datacenters. Pause the video now. Run the request or examine the supplied response.

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Find two candidate locations in the filing before continuing.

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Item Seven contains a contractual-obligations table under Material Cash Requirements and Other Obligations. Its footnotes point to Note Six for construction and Note Thirteen for leases in Item Eight.

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Notice the route: a business question led us to management's discussion, then to related notes. This is a different use of the filing map than the receivables search.

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Suppose an assistant adds three rows and calls the sum Microsoft's datacenter commitments. Is that a supported interpretation? Choose how you would handle its answer before advancing.

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Keep the rows separate and read their footnotes. The purchase row primarily relates to datacenters; primarily is not exclusively. The lease row also covers offices, other facilities, and equipment.

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A sum of these rows is not a reported datacenter total. The table itself remains useful when we preserve the row meanings.

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Here are the three selected rows from the 2025 table, in millions of dollars. Construction commitments total 32,149. Purchase commitments total 109,953.

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Operating and finance leases, including imputed interest, total 178,701. These are reported payments due under different arrangements, not three labels for the same cost.

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The construction row points to the property and equipment note. The purchase footnote says those commitments primarily relate to datacenters and do not include the construction commitments above.

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Microsoft's discussion of leases includes datacenters, offices, facilities, and equipment; the lease row also includes imputed interest. The lease row includes an interest portion in its future payments.

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Keep each row's scope attached to its amount.

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Now test a draft claim that calls the sum of those rows the cost of Microsoft's AI expansion. Pause the video. Identify one fact the table supports, two ways the claim exceeds the filing, and one question still open.

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Write two sentences that a reader could trace back to Item Seven.

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Which reason most directly defeats the label cost of AI expansion? The issue is more than a units conversion. Choose before the answer appears.

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The rows include different activities and kinds of payments. The filing does not call their sum the cost of AI expansion. Units matter, but accurate arithmetic cannot repair a category error.

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Nor does a future payment table mean every amount is an expense now.

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A source-bound response can give the reported construction and purchase commitments and explain that purchases primarily relate to datacenters.

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It can give the lease row while stating that the row covers other facilities and equipment and includes imputed interest.

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The useful conclusion is bounded: these rows do not establish a single total cost of Microsoft's AI expansion.

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Stop when the answer has the relevant rows, amounts, units, source locations, and scope limits. If the user needs a datacenter-only total or a forecast of AI expansion cost, the report does not settle it.

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More prompting is not a substitute for missing disclosure; that is a point to seek more information or human judgment.

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The assistant has found the rows and footnotes. What should its final answer do? Decide whether completion means inventing a total or stating the reported information and its limit.

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Report the supported rows and explain the missing total, then stop. The answer gives the reader passages to inspect and makes clear what remains unknown.

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Continuing until a single number appears would reward an unsupported conclusion.

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When you use AI on a different company, start with the business question. Ask which report and passages can answer it, separate reported figures from calculations or inferences, and decide where the evidence ends.

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If the first answer is correct, you have still learned to assess how it was found and whether it is ready to use.

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Complete Chapter 5 and its optional practice, and keep the source packet available for the filing work. The extended Unit 1 review is due Wednesday, September 16, at 11:59 PM.

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Next, we will classify amounts and examine income-statement subtotals in Unit 2. The remaining adjustment slides are optional review.