How to Read a 10-K: A Walkthrough of Microsoft's 2026 Annual Report

Microsoft's net income rose 31% in its 2026 fiscal year, to $133.7 billion. Its free cash flow fell 6%. Both facts are in the same annual report.

That gap is why the 10-K is worth reading. A 10-K is the annual report every US-listed company files with the SEC. Microsoft's runs to about 100 pages plus exhibits, and the headline numbers are only a small part of it. Below, we work through Microsoft's 10-K for the year ended June 30, 2026: which sections to read and in what order, how long each takes, one number check you can do yourself, and the four red flags we found.

The short version

Don't read it front to back. Start with management's summary of the year (Item 7), then the financial statements (Item 8), then the notes. Leave the business description for later.
Budget about 90 minutes for a first pass on a large company.
Check profit against cash. Microsoft's operating cash flow was $182.9 billion, 1.37 times net income. Most of that difference comes from depreciation, but a $10.7 billion swing in other income came from its OpenAI stake.
Read the notes for what the headline numbers leave out. Microsoft has $329.1 billion of datacenter leases signed but not yet on its balance sheet. You'll only find that in Note 13.
Use the 10-Q to update, not to start. The quarterly report is shorter, unaudited and mostly repeats the 10-K's structure.

Where to find the filing

Every 10-K is free on the SEC's EDGAR search. Type the company name, filter by form type "10-K," and open the main document. Microsoft filed this one on July 29, 2026, 29 days after its fiscal year ended. Large companies get 60 days.

A 10-K follows a fixed layout set by SEC rules, so once you know one, you can find your way around any of them:

Part	Item	What it is	Microsoft's pages
I	1. Business	What the company sells and how it's organized	3–13
I	1A. Risk Factors	Everything management says could go wrong	14–31
I	1C. Cybersecurity	How cyber risk is managed	—
II	7. Management's Discussion and Analysis (MD&A)	Management explains the year's numbers	34–49
II	7A. Market risk	Exposure to rates, currencies and prices	—
II	8. Financial Statements	Income statement, balance sheet, cash flows, notes, auditor's report	50–90
II	9A. Controls and Procedures	Whether internal controls over reporting work	After Item 8
III	10–14	Executive pay and governance, usually pointing to the proxy statement	—

The order to read it in

Step	Section	Why this order	Time
1	MD&A overview and highlights (Item 7)	Management's own one-page summary of the year	10 min
2	Income statement, balance sheet, cash flow statement (Item 8)	The audited numbers the summary should match	20 min
3	Segment results (MD&A and the segment note)	Shows which part of the business drove the year	10 min
4	Notes on revenue, leases, investments and taxes	Where obligations and one-off items are disclosed	25 min
5	Risk factor headings (Item 1A)	Skim the headings and read only the new ones	10 min
6	Auditor's report, critical audit matters	Where the auditor says the hardest judgments are	5 min
7	Business (Item 1)	Context, once you know which questions to ask	10 min

Reading the numbers before the business description sounds backwards. But the description is mostly marketing, and reading it first makes you trust the story before you've checked it. Read it last, with questions.

Step 1: what management says happened

Item 7 opens with highlights. For fiscal 2026 Microsoft reported:

Revenue up 18% to $331.8 billion, driven by Microsoft Cloud, which rose 27% to $214.4 billion
Azure and other cloud services revenue up 41%
Operating income up 21% to $155.2 billion
Microsoft Cloud gross margin down to 66%, "driven by continued investments in AI infrastructure and growing AI product usage"

Note the last point. Revenue rose, but each dollar of cloud revenue cost more to deliver. That gives you your first question to carry into the statements: is the AI build-out costing more than it's bringing in?

Step 2: the three statements

Here are the headline lines, taken straight from Item 8:

(Millions)	FY2026	FY2025	Change
Revenue	$331,839	$281,724	+18%
Operating income	$155,237	$128,528	+21%
Other income (expense), net	$10,697	−$4,901	Swing of $15.6B
Net income	$133,749	$101,832	+31%
Net cash from operations	$182,935	$136,162	+34%
Additions to property and equipment	−$115,948	−$64,551	+80%

Net income grew 10 points faster than operating income. The gap is "other income," which went from a $4.9 billion loss to a $10.7 billion gain. When profit below the operating line moves that much, find out why before you quote the growth rate.

The MD&A answers it. Net income included a $5.0 billion after-tax gain from Microsoft's investment in OpenAI, mostly a "dilution gain from the OpenAI Recapitalization," against a $3.6 billion loss the year before. Strip both out and net income grew about 22%, not 31%:

Step	Calculation	Result
FY2026 net income excluding OpenAI	$133.7B − $5.0B	$128.7B
FY2025 net income excluding OpenAI	$101.8B + $3.6B	$105.4B
Underlying growth	$128.7B ÷ $105.4B − 1	22%

Microsoft reports this adjustment itself, as non-GAAP "adjusted net income." GAAP means generally accepted accounting principles, the official rules; non-GAAP figures are the company's own adjusted versions. Here the adjustment is reasonable, because an accounting gain on an investee's recapitalization isn't operating profit. Even so, always check what a non-GAAP figure removes and whether it removes losses as readily as gains.

Worked check: reconcile profit to cash

The cash flow statement starts with net income and adjusts it to cash. Lining up those adjustments is the fastest test of earnings quality, meaning how closely reported profit matches cash coming in.

(Millions)	FY2026
Net income	$133,749
+ Depreciation, amortization, and other	+38,534
+ Stock-based compensation	+12,405
− Net gains on investments and derivatives	−11,047
+ Deferred income taxes	+14,189
± Changes in working capital (nine lines)	−4,895
Net cash from operations	$182,935

The rows add up exactly. Three of them are worth a closer look:

Depreciation of $38.5 billion, up 31% in a year. Servers bought in the AI build-out are now being expensed. Our research on the AI depreciation lag explains why that charge keeps rising after spending peaks.
Stock-based compensation of $12.4 billion, about 9% of net income. It costs no cash, but shareholders pay for it through dilution.
$11.0 billion of investment gains subtracted. These are mostly the OpenAI gains, which boosted net income but brought in no cash, so the statement takes them back out.

Cash from operations covered net income 1.37 times, which is healthy. The trouble comes on the next line.

Free cash flow: where the 31% disappears

Free cash flow is cash from operations minus capital expenditure (capex), the money spent on property and equipment. Microsoft doesn't report it in the 10-K, so you work it out yourself:

(Millions)	FY2026	FY2025
Net cash from operations	$182,935	$136,162
Additions to property and equipment	−115,948	−64,551
Free cash flow	$66,987	$71,611
Change	−6%

Capex rose 80% and took 63 cents of every dollar of operating cash. Even that understates the spend:

Finance leases. Microsoft obtained $24.6 billion of equipment and datacenters through finance leases in fiscal 2026, according to Note 13. Leased assets never show up as capex. Count them and free cash flow drops to roughly $42 billion.
Component prepayments. The MD&A says investing cash also rose because of a "$22.2 billion increase in cash used in other investing primarily to facilitate the purchase of components." That sits in "Other, net," not the capex line.

None of this means Microsoft is in trouble. It means "net income up 31%" and "more cash for shareholders" are different claims, and the 10-K only supports the first one. To test how long spending at this level can be funded, put these figures into the capex and free cash flow coverage calculator.

Step 3 and 4: what the notes add

The notes come after the statements and take the longest. For Microsoft, four of them change the picture.

Note 13, Leases: $329.1 billion not yet on the balance sheet. "As of June 30, 2026, we had additional leases, primarily for datacenters, that had not yet commenced of $329.1 billion." They start between fiscal 2027 and 2033. Compare the leases already on the balance sheet, $88.5 billion of liabilities, and long-term debt principal of $46.1 billion. The MD&A's contractual obligations table puts total commitments at $743.8 billion, including $194.1 billion of purchase commitments that are "primarily" for datacenters.

Note 12, Unearned Revenue: a $684 billion backlog. Remaining performance obligations are revenue Microsoft has contracted for but not yet earned. They reached $684 billion, and Microsoft expects to recognize about 30% in the next 12 months. A backlog this size supports the spending, but it's only as good as the customers behind it.

Note 1, Accounting Policies: OpenAI is a related party. Microsoft owns about 25% of OpenAI on an as-converted basis. It recorded $24.1 billion of revenue from OpenAI in fiscal 2026 and was owed $6.0 billion at year end. So OpenAI is both a large customer and an investment whose value flows through Microsoft's income statement.

Note 18, Segment Information. The segment tables show where growth came from and what it cost:

Segment	Revenue	Revenue growth	Cost of revenue growth	Operating income
Productivity and Business Processes	$140.0B	+16%	+12%	$83.9B
Intelligent Cloud	$137.8B	+30%	+44%	$57.0B
More Personal Computing	$54.1B	−1%	−7%	$14.4B

In Intelligent Cloud, the cost of delivering revenue grew faster than revenue itself. That's the margin pressure from Step 1, now pinned to one segment.

Step 5 and 6: risks and the auditor

Risk factors. Item 1A runs about 17 pages under five headings: strategic and competitive, cybersecurity and privacy, operational, legal and regulatory, and general. Don't read every word. Compare this year's headings with last year's and read what's new or longer. This year, two stand out:

Power. "The availability, reliability, and cost of electrical power are critical to the operation and expansion of our datacenters."
Taxes. The IRS is seeking "an additional tax payment of $28.9 billion plus penalties and interest" over how Microsoft priced transactions between its own subsidiaries in 2004 to 2013. Microsoft disagrees and says its reserves are adequate.

Critical audit matters. In its report, the auditor, Deloitte & Touche, names the areas that needed the most judgment. For Microsoft there are two: revenue recognition on multi-product customer contracts, and the uncertain tax positions tied to the IRS dispute. If you only have time for two notes, the auditor has just told you which two.

Red flags we checked

Check	What to look for	Microsoft FY2026
Profit vs. cash	Operating cash flow consistently below net income	Fine: 1.37 times
Gains below the operating line	Other income driving profit growth	Yes: OpenAI gains added 9 points to net income growth
Off-balance-sheet commitments	Large leases or purchase obligations in the notes	Yes: $329.1B of uncommenced leases
Related parties	Revenue from companies the business owns or controls	Yes: $24.1B of revenue from OpenAI
Receivables growing faster than revenue	Customers paying more slowly	Receivables used $12.7B of cash; check the trend each quarter
Auditor's opinion	Anything other than an unqualified ("clean") opinion	Clean, with two critical audit matters

A flag isn't a verdict. It's a question you need to answer before you trust the headline numbers.

10-K vs. 10-Q: what changes

A 10-Q is the quarterly report, filed for each of the first three quarters. Microsoft's fourth quarter is covered by the 10-K.

	10-K	10-Q
Frequency	Once a year	Three times a year
Deadline for large companies	60 days after year end	40 days after quarter end
Audited?	Yes, with an auditor's opinion	No, reviewed but not audited
Business description	Full Item 1	None
Risk factors	Full list	Only material changes
Financial statements	Full, with all notes	Condensed, with fewer notes
Best use	Build your baseline	Check whether the baseline still holds

Read the 10-K once a year to understand the company. Then use each 10-Q to check the same few numbers: capex, free cash flow, the backlog and margins. Microsoft's next 10-Q, for the quarter ending September 30, 2026, should arrive in late October. Material events between reports appear in 8-Ks.

Our read

The 10-K didn't change our view that Microsoft is an exceptional business. It did change which number to watch. Headline earnings growth of 31% was flattered by an OpenAI accounting gain and doesn't reflect cash available to shareholders, which fell. What matters next is whether $684 billion of contracted revenue turns into enough cash to cover $116 billion a year of capex plus $329 billion of leases still to come.

That's what a 10-K is for. It doesn't hand you a conclusion, but it tells you exactly which question will decide one.

Try it yourself

Pick any company you own or are considering. It takes about 30 minutes.

Open its latest 10-K on EDGAR and find Item 7. Write down revenue, operating income and net income growth.
If net income grew faster than operating income, find out why in "other income" or the tax line.
Go to the cash flow statement. Divide cash from operations by net income, then subtract additions to property and equipment to get free cash flow.
Search the document for "not yet commenced" and "purchase commitments" and note the totals.
Read the critical audit matters in the auditor's report.
Compare your numbers with the company's stock page. Anything you can't explain is your research question.

Questions readers ask

How long does it take to read a 10-K?

A focused first pass takes about 90 minutes for a large company, using the order above. Reading every word of Microsoft's would take most of a day, and most of it wouldn't change your view.

What is the most important part of a 10-K?

The financial statements and their notes in Item 8. MD&A tells you what management wants you to notice. The notes tell you what it is required to disclose, including leases, commitments, related parties and one-off gains.

What's the difference between a 10-K and an annual report?

The 10-K is the formal SEC filing. Many companies also publish a glossier "annual report to shareholders" with a letter from the CEO. The figures should match, but only the 10-K has the full notes and risk factors in a standard format.

Should I read the 10-K or the 10-Q first?

The 10-K. It sets out the business, the full risks and audited numbers. A 10-Q then shows what has changed since. Our stock research checklist shows where both fit in a full review.

Where can I find older 10-Ks?

On EDGAR, under the company's filings, filtered to form 10-K. Comparing two or three years shows trends that one report can't. Our guide to stock research websites covers free tools that make this faster.

Go deeper with member research

Microsoft's 10-K raises the same question as every hyperscaler's right now: will AI spending earn its return?

Issue 03: The AI bill is arriving late to earnings: why the depreciation in Microsoft's cash flow statement keeps rising after capex peaks, and when it hits margins.
AI capex accounting: Microsoft, Amazon, Google and Meta compared: how finance leases and other lines make Big Tech's capex numbers hard to compare, and how to line them up.
The fundamental research course: 24 lessons covering everything in this walkthrough in more depth, including finding the evidence in US filings, reading the cash flow statement and leases and hidden obligations. The first chapter is free.

Limits of this walkthrough

Figures come from Microsoft's Form 10-K for the fiscal year ended June 30, 2026, filed July 29, 2026. Later filings may revise or update them.
Free cash flow and the lease-adjusted version are our calculations, not figures Microsoft reports. Other analysts define free cash flow differently.
Page numbers refer to the filing's own pagination and are approximate.
Section order and content vary somewhat by company, especially for banks, insurers and REITs.
This is research, not investment advice.