Cash Flows at Amazon.com by Richard A. Price III

CASE QUESTIONS 1. Graph the financial statement items in Exhibit 1 and familiarize yourself with the 1997 and 2010 financial statements (Exhibits 4–6 and 7–9). Using your judgment, identify time periods of similar characteristics and classify them using the following life cycle terms: introduction, growth, maturity, or decline (see Exhibit 10 for definitions). For each period labeled, provide support for your classification. Specifically discuss the patterns observed (e.g., in revenue, income, operating cash flow, investing cash flow, and financing cash flow) and how they indicate where Amazon.com is in the life cycle. 2. Comment on the general trend in total investment in Exhibit 3 (cash and stock) over time (excluding marketable securities). Provide possible explanations for the variation observed. 3. What factors do you think influence Amazon.com’s decision to use cash versus stock in its acquisitions? Comment on trends observed over time in the relative amount of cash versus stock acquisitions in Exhibit 3. 4. Why do you think Amazon.com invests in marketable securities? What effect does this have on investing cash flow (CFI)? 5. What are the largest adjustments listed in the operating section of the cash flow statement for 1997 (Exhibit 4)? Provide an interpretation and discuss whether they should be of concern to investors. 6. Referring only to the income statement and the balance sheet (Exhibits 5 and 6 for 1997, and Exhibits 8 and 9 for 2010) estimate (a) the amount of cash collected from customers, and (b) the amount of cash paid for inventory in 1997 and 2010. 7. Referring to the cash flow statements from 1997 and 2010 (Exhibits 4 and 7), does the change in the balance sheet accounts you used to answer Question 6 articulate with (i.e., agree with) what is reported in the statement of cash flows? 8. In 2009 Amazon.com acquired Zappos.com in a stock acquisition valued at more than $1 billion. Assume that in the acquisition, the value of Zappos.com’s inventory was $200 million, and that the acquisition happened on the last day of the fiscal year. a. Discuss the effect of the inventory acquired from Zappos on Amazon.com’s balance sheet. b. Discuss the effect on the statement of cash flows, including what the effect would be if the company used the direct method. c. How does your answer to part b change if this were a cash acquisition instead? 9. Use the information provided in Exhibit 11 to identify the first year in which the balance sheet and cash flow statement do not articulate. Also identify the year with the ‘‘worst’’ articulation, i.e., the greatest absolute difference between the changes observed on the balance sheet compared with those reported on the cash flow statement. Provide possible explanations for why they do or do not articulate. 10. Using the direct method, prepare the operating section of the statement of cash flows for 1997 using the information available in the financial statements (Exhibits 4–6) as well as the supplementary cash flow information (Exhibit 12). The provided template (Exhibit 13) may be useful to prepare your answer. Does the cash from operations you compute using the direct-method agree with what Amazon.com reports using the indirect method?