Amazon.com 2007 Annual Report Download - page 35

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Recent Accounting Pronouncements
In September 2006, the Financial Accounting Standards Board (FASB) issued SFAS No. 157, Fair Value
Measurements, which defines fair value, establishes a framework for measuring fair value in accordance with
generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157
is effective for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. We
do not expect the adoption of SFAS No. 157 to have a material impact on our consolidated financial statements.
The FASB may delay a portion of this standard.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities. SFAS No. 159 permits companies to choose to measure many financial instruments and
certain other items at fair value. SFAS No. 159 is effective for financial statements issued for fiscal years
beginning after November 15, 2007. We do not expect the adoption of SFAS No. 159 to have a material impact
on our consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (R), Business Combinations, and SFAS No. 160,
Noncontrolling Interests in Consolidated Financial Statements. SFAS No. 141 (R) requires an acquirer to
measure the identifiable assets acquired, the liabilities assumed and any noncontrolling interest in the acquiree at
their fair values on the acquisition date, with goodwill being the excess value over the net identifiable assets
acquired. SFAS No. 160 clarifies that a noncontrolling interest in a subsidiary should be reported as equity in the
consolidated financial statements. The calculation of earnings per share will continue to be based on income
amounts attributable to the parent. SFAS No. 141 (R) and SFAS No. 160 are effective for financial statements
issued for fiscal years beginning after December 15, 2008. Early adoption is prohibited. We have not yet
determined the effect on our consolidated financial statements, if any, upon adoption of SFAS No. 141 (R) or
SFAS No. 160.
Liquidity and Capital Resources
Cash flow information is as follows:
Year Ended December 31,
2007 2006 2005
(in millions)
Cash provided by (used in):
Operating activities .................................................. $1,405 $ 702 $ 733
Investing activities ................................................... 42 (333) (778)
Financing activities .................................................. 50 (400) (193)
Free cash flow, a non-GAAP financial measure, was $1.18 billion for 2007, compared to $486 million and
$529 million for 2006 and 2005. See “Results of Operations—Non-GAAP Financial Measures” below for a
reconciliation of free cash flow to cash provided by operating activities. The increase in free cash flow in 2007
primarily resulted from the increased growth rate of our revenue and gross profit relative to operating expenses.
The decrease in free cash flow in 2006 was primarily driven by our increased expenditure in technology and
content and excess tax benefits from stock-based compensation deductions now classified as financing cash
flows. Free cash flow for 2005 included the effect of our payment of a $40 million patent litigation settlement.
Operating cash flows and free cash flows can be volatile and are sensitive to many factors, including changes in
working capital, and the timing and magnitude of capital expenditures. Working capital at any specific point in
time is subject to many variables, including seasonality, inventory management and category expansion, the
timing of cash receipts and payments, 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, at fair value, were $3.1 billion, $2.0 billion, and $2.0 billion at
December 31, 2007, 2006 and 2005. Amounts held in foreign currencies were $1.2 billion, $623 million, and
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