Amazon.com 2004 Annual Report Download - page 38

income. In accordance with SFAS No. 52, currency adjustments arising before the fourth quarter of 2003
continue to be included as a component of “Accumulated other comprehensive income” on our consolidated
balance sheets. Resulting from the remeasurement of intercompany balances using exchange rates at the
reporting dates, we recorded gains of $41 million and $36 million for 2004 and 2003. Repayments among the
entities during 2004 were $210 million.
Valuation of Deferred Tax Assets
SFAS 109, “Accounting for Income Taxes,” requires that deferred tax assets be evaluated for future
realization and reduced by a valuation allowance to the extent we believe a portion will not be realized. We
consider many factors when assessing the likelihood of future realization of our deferred tax assets including our
recent cumulative earnings experience by taxing jurisdiction, expectations of future taxable income, the carry-
forward periods available to us for tax reporting purposes, and other relevant factors. At December 31, 2004, our
net deferred tax assets are $363 million, comprised of approximately $270 million relating to our net operating
loss carryforwards (“NOLs”), with the remaining portion related to temporary timing differences between tax
and financial reporting. Classification of deferred tax assets between current and long-term categories is based on
the expected timing of realization, and the valuation allowance is allocated on a pro-rata basis.
We had a net tax benefit in 2004 of $233 million resulting primarily from the effect of changes in our
valuation assessment of deferred tax assets during 2004. In connection with this assessment, we also recorded a
net credit to “Stockholders’ Deficit” of $106 million on our consolidated balance sheet in 2004. The range of
possible judgments relating to the valuation of our deferred tax assets is very wide. For example, had we
determined that the weight of available evidence did not support a decision that a portion of our deferred tax
asset will be realized, the amount recorded to “Provision (benefit) for income taxes” would have been an expense
of $12 million (rather than a benefit of $233 million) for 2004. Alternatively, if we had concluded that the weight
of available evidence supported a decision that substantially all of our deferred tax assets may be realized, we
would have recorded a substantially larger credit to “Stockholders’ Deficit.”
Significant judgment is required in making this assessment, and it is very difficult to predict when, if ever,
our assessment may conclude that the remaining portion of our deferred tax assets are realizable.
Liquidity and Capital Resources
Our financial focus is on long-term, sustainable growth in free cash flow1.Free cash flow was $477 million
for 2004 compared to $346 million for 2003, an increase of 38%. Operating cash flows and free cash flows can
be volatile and are sensitive to many factors, including changes in working capital. Working capital at any
specific point in time is subject to many variables, including seasonality, the timing of expense payments,
discounts offered by vendors, vendor payment terms, and fluctuations in foreign exchange rates.
Our principal sources of liquidity are cash flows generated from operations and our cash, cash equivalents,
and marketable securities balances, which were $1.8 billion and $1.4 billion at the end of 2004 and 2003.
Amounts held in foreign currencies were $970 million and $764 million at the end of 2004 and 2003, and were
primarily Euros, British Pounds, and Yen.
Cash provided by operating activities was $567 million, $392 million, and $174 million in 2004, 2003, and
2002. Our operating cash flows result primarily from cash received from our customers and third-party sellers,
offset by cash payments we make to suppliers of products and services, employee compensation, credit card
transaction fees, bad debt, and interest payments on our long-term debt obligations. Cash received from
1Free cash flow is defined as net cash provided by operating activities less purchases of fixed assets,
including capitalized internal-use software and website development, both of which are presented on our
statements of cash flows.
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