Microsoft's annual report came in the mail today. Accounting students have an advantage when it comes to dissecting financial statements because we understand exactly how they are (often creatively) constructed.

Firms can choose not to report compensation expense from employee stock options, but are required to disclose pro forma net income and earnings per share in the Notes.

These adjusted results reflect the expense as if the fair-value-based method defined in SFAS 123 had been applied. As you can see with Microsoft, it can make a whopping big difference to the bottom line when a company excludes their employee stock option compensation expense.

You gotta read the Notes.

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