NetFlix 2006 Annual Report Download - page 61

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NETFLIX, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(in thousands, except share and per share data and percentages)
1. Organization and Summary of Significant Accounting Policies
Description of Business
Netflix, Inc. (the “Company”) was incorporated on August 29, 1997 and began operations on April 14,
1998. The Company is an online movie rental subscription service, providing more than 6,300,000 subscribers
with access to a comprehensive library of more than 70,000 movie, television and other filmed entertainment
titles on DVD. The Company offers a variety of subscription plans starting at $4.99. There are no due dates, no
late fees and no shipping fees. Subscribers select titles at the Company’s Web site aided by its proprietary
recommendation service, receive them on DVD by U.S. mail and return them to the Company at their
convenience using the Company’s prepaid mailers. After a DVD has been returned, the Company mails the next
available DVD in a subscriber’s queue. The Company also offers certain titles through its instant-viewing
feature. All of the Company’s revenues are generated in the United States.
Basis of Presentation
The consolidated financial statements include the accounts of the Company and its wholly-owned
subsidiary. Intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items
subject to such estimates and assumptions include the estimate of useful lives and residual value of its DVD
library; the valuation of stock-based compensation; and the recognition and measurement of income tax assets
and liabilities. On an ongoing basis, the Company evaluates its estimates, including those related to the useful
lives and residual values surrounding the Company’s DVD library. The Company bases its estimates on
historical experience and on various other assumptions that the Company believes to be reasonable under the
circumstances. Actual results may differ from these estimates.
Reclassifications
In accordance with the SEC Staff Accounting Bulletin No. 107 (“SAB 107”), effective January 1, 2006,
stock-based compensation is no longer presented as a separate line item on our Consolidated Statements of
Operations. Stock-based compensation is now presented in the same lines as cash compensation paid to the same
individuals. Stock-based compensation recognized in prior periods has been reclassified to conform to the current
presentation.
During 2006, the Company began classifying changes in Accounts payable related to the acquisition of its
DVD library and Property and equipment as a component of cash flows from investing activities. Changes in
Accounts payable related to acquisitions of DVD library and Property and equipment were previously classified
within cash flows from operating activities. Accordingly, the Consolidated Statements of Cash Flows for all
periods presented have been reclassified to conform to the current presentation.
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