Microsoft 2011 Annual Report Download - page 30

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Of the cash, cash equivalents, and short-term investments at June 30, 2011, approximately $45 billion was held
by our foreign subsidiaries and were subject to material repatriation tax effects. The amount of cash and
investments held by foreign subsidiaries subject to other restrictions on the free flow of funds (primarily currency
and other local regulatory) was approximately $379 million. As of June 30, 2011, approximately 68% of the short-
term investments held by our foreign subsidiaries were invested in U.S. government and agency securities,
approximately 12% were invested in corporate notes and bonds of U.S. companies, and 5% were invested in U.S.
mortgage-backed securities, all of which are denominated in U.S. dollars.
Securities lending
We lend certain fixed-income and equity securities to increase investment returns. The loaned securities continue
to be carried as investments on our balance sheet. Cash and/or security interests are received as collateral for
the loaned securities with the amount determined based upon the underlying security lent and the
creditworthiness of the borrower. Cash received is recorded as an asset with a corresponding liability. Our
securities lending payable balance was $1.2 billion as of June 30, 2011. Our average and maximum securities
lending payable balances for the fiscal year were $1.6 billion and $3.3 billion, respectively. Intra-year variances in
the amount of securities loaned are mainly due to fluctuations in the demand for the securities.
Valuation
In general, and where applicable, we use quoted prices in active markets for identical assets or liabilities to
determine the fair value of our financial instruments. This pricing methodology applies to our Level 1 investments,
such as exchange-traded mutual funds, domestic and international equities, and U.S. treasuries. If quoted prices
in active markets for identical assets or liabilities are not available to determine fair value, then we use quoted
prices for similar assets and liabilities or inputs other than the quoted prices that are observable either directly or
indirectly. This pricing methodology applies to our Level 2 investments such as corporate notes and bonds,
foreign government bonds, mortgage-backed securities, and agency securities. Level 3 investments are valued
using internally developed models with unobservable inputs. Assets and liabilities measured using unobservable
inputs are an immaterial portion of our portfolio.
A majority of our investments are priced by pricing vendors and are generally Level 1 or Level 2 investments as
these vendors either provide a quoted market price in an active market or use observable inputs for their pricing
without applying significant adjustments. Broker pricing is used mainly when a quoted price is not available, the
investment is not priced by our pricing vendors, or when a broker price is more reflective of fair values in the
market in which the investment trades. Our broker-priced investments are generally labeled as Level 2
investments because the broker prices these investments based on similar assets without applying significant
adjustments. In addition, all of our broker-priced investments have a sufficient level of trading volume to
demonstrate that the fair values used are appropriate for these investments. Our fair value processes include
controls that are designed to ensure appropriate fair values are recorded. These controls include model
validation, review of key model inputs, analysis of period-over-period fluctuations, and independent recalculation
of prices where appropriate.
Cash Flows
Fiscal year 2011 compared with fiscal year 2010
Cash flows from operations increased $2.9 billion during the current fiscal year to $27.0 billion due mainly to
increased revenue and cash collections from customers. Cash used in financing decreased $4.9 billion to $8.4
billion due mainly to a $5.8 billion increase in proceeds from issuance of debt, net of repayments, offset in part by
a $602 million increase in cash paid for dividends. Cash used in investing increased $3.3 billion to $14.6 billion
due to a $5.8 billion increase in purchases of investments, offset in part by a $2.5 billion increase in cash from
securities lending.
Fiscal year 2010 compared with fiscal year 2009
Cash flow from operations increased $5.0 billion, primarily due to payment of $4.1 billion to the Internal Revenue
Service in the prior year as a result of our settlement of the 2000-2003 audit examination along with increased
cash received from customers in the current year. Cash used for financing increased $5.8 billion, primarily due to
a $5.6 billion decrease in net cash proceeds from issuance and repayments of short-term and long-term debt.
Financing activities also included a $1.9 billion increase in cash used for common stock repurchases, which was