Endnotes
1
“Statement of Financial Accounting Concepts No. 8: Conceptual Framework for Financial Reporting,” Financial
Accounting Standards Board, September 2010.
2
Income statements and balance sheets have been around for a long time (double-entry bookkeeping, a
powerful innovation, goes back to the 13
th
century). In 1863, Northern Central Railroad summarized its cash
transactions in an early version of a cash flow statement. In 1902, U.S. Steel provided a reconciliation of its
current assets minus accounts payable, a rough proxy for working capital. (See
https://digital.case.edu/islandora/object/ksl%3Auniann00.) In 1971, the Accounting Principles Board (APB)
issued Opinion 19, which required a funds statement. In 1987, the Financial Accounting Standards Board (FASB)
released Statement of Financial Accounting Standards No. 95 to supersede Opinion 19. It specified a cash flow
statement be included in financial reports. There are two noteworthy points about FAS No. 95. First, it
encouraged companies to use the “direct method,” which starts the section on cash flows from operations with
receivables from customers, relative to the “indirect method,” which starts the section with net income. Nearly
all companies use the indirect method today. Second, there was substantial dissension on the FASB board,
which is noted in the release. For a more complete discussion see, Geoffrey Poitras, “History of the Cash Flow
Statement” at www.sfu.ca/~poitras/cash-flow-stmt-history.pdf. For a broader discussion of the history of
accounting, see Gary John Previts and Barbara Dubis Merino, A History of Accountancy in the United States:
The Cultural Significance of Accounting (Columbus, OH: Ohio State University Pres, 1998).
3
Allen G. Arnold, R. Barry Ellis, V. Sivarama Krishnan, “Toward Effective Use of the Statement of Cash Flows,”
Journal of Business and Behavioral Sciences, Vol. 30, No. 2, Fall 2018, 46-62.
4
As we have discussed before, Wal-Mart Stores, Inc. had negative free cash flow each year from 1972-1986.
Its annual total shareholder return was 18 percentage points higher than that of the S&P 500 during that period.
5
For example, see the corporate performance statement in Alfred Rappaport, “The Economics of Short-Term
Performance Obsession,” Financial Analysts Journal, Vol. 61, No. 3, May/June 2005, 65-79.
6
Katharine Adame, Jennifer Koski, Katie Lem, and Sarah McVay, “Free Cash Flow Disclosure in Earnings
Announcements,” Working Paper, June 3, 2020. For example, see Paul Roche and Sid Tandon, “SaaS and the
Rule of 40: Keys to the Critical Value Creation Metric,” McKinsey & Company, August 3, 2021.
7
The standard definition of free cash flow in finance is net operating profit after taxes (NOPAT) minus investment
in future growth. NOPAT equals earnings before interest and taxes (EBIT) plus amortization of acquired
intangibles assets minus cash taxes. Cash taxes reflect the tax provision, deferred taxes, and the tax shield. As
such, NOPAT is the unlevered cash earnings of a company. Investment in future growth includes changes in
working capital, capital expenditures net of depreciation, and acquisitions net of divestitures. Two components
of investment are reflected in cash flow from operating activities: depreciation and amortization and changes in
working capital. In Amazon’s case, changes in working capital have historically been a source of cash because
the company receives cash from its customers sooner than it pays its suppliers. (To be more formal, the company
has a negative cash conversion cycle.) In effect, working capital has been a source of financing for the company.
This is not unique to Amazon but is an important consideration in assessing investment, profit, and financing.
8
Brian J. Hall, “Six Challenges in Designing Equity-Based Pay,” Journal of Applied Corporate Finance, Vol. 15,
No. 3, Spring 2003, 21-33.
9
Michael C. Jensen and Kevin J. Murphy, “CEO Incentives: It's Not How Much You Pay, But How,” Harvard
Business Review, Vol. 68, No. 3, May-June 1990, 138-153.
10
Alfred Rappaport, “New Thinking on How to Link Executive Pay with Performance,” Harvard Business Review,
Vol. 77, No. 2, March-April 1999, 91-101.
11
“Stock Options are Not a Free Lunch,” Forbes, May 18, 1998.
12
Judy A. Laux and Abdou N’Dir, “Employee Stock Options and Market Efficiency,” Journal of Applied Business
Research, Vol. 23, No. 2, Second Quarter 2007.
13
Partha Mohanram, Brian White, and Wuyang Zhao, “Stock-Based Compensation, Financial Analysts, and
Equity Overvaluation,” Review of Accounting Studies, Vol. 25, No. 3, September 2020, 1040-1077.
14
Qi Sun and Mindy Z. Xiaolan, “Financing Intangible Capital,” Journal of Financial Economics, Vol. 133, No. 3,
September 2019, 564-588.