Overstock.com 2007 Annual Report Download - page 54

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way of viewing our cash flows and liquidity that, when viewed with our GAAP results, provides a more complete understanding of factors and trends
affecting our cash flows. Free cash flow, which we reconcile to "Net cash provided by (used in) operating activities", is cash flow from operations reduced by
"Expenditures for property and equipment". Although we believe that cash flow from operating activities is an important measure, we believe free cash flow
is a useful measure to evaluate our business since purchases of fixed assets are a necessary component of ongoing operations. Therefore, we believe it is
important to view free cash flow as a complement to our entire consolidated statements of cash flows.
Three months ended
December 31,
Twelve months ended
December 31,
2006 2007 2006 2007
Net cash provided by (used in) operating activities $51,949 $55,734 $(26,293) $ 9,977
Expenditures for property and equipment (3,766) (411) (23,441) (2,643)
Free cash flow $48,183 $55,323 $(49,734) $ 7,334
The balance of our Management's Discussion and Analysis of Financial Condition and Results of Operations provides further information about the
matters discussed above and other important matters affecting our business.
Critical Accounting Policies and Estimates
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America.
The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and
expenses. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the
results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual
results may differ from these estimates under different assumptions or conditions. Our critical accounting policies are as follows:
revenue recognition;
estimating valuation allowances and accrued liabilities (specifically, the reserve for returns, the allowance for doubtful accounts and the reserve
for obsolete and damaged inventory);
internal use software;
accounting for income taxes;
valuation of long-lived and intangible assets and goodwill; and
stock based compensation and performance share plan.
Revenue recognition. We derive our revenue primarily from two sources: direct revenue and fulfillment partner revenue, including listing fees and
commissions collected from products being listed and sold through the Auctions tab of our Website as well as advertisement revenue derived from our cars
listing business. The Company has organized its operations into two principal segments based on the primary source of revenue: Direct revenue and
Fulfillment partner revenue (see Item 15 of Part IV, "Financial Statements"—Note 23—"Business Segments").
From our inception through the third quarter of 2007, we recorded revenue based on product ship date. In the fourth quarter of 2007, we determined that
we should not have recorded revenue until the delivery date. We performed a detailed analysis of this error and the impact of recording the
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