Question

Based on the information contained in these financial statements, compute free cash flow for Amazon at December 31, 2016 and Wal-Mart for January 31, 2017. What conclusions concerning the management of cash can be drawn from free cash flow for each company?

AMAZON.COM, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS in millions) Year Ended December 31, 2014 2015 2016 $ 8,658 $ 14.557 $ 15,890 (241) 596 2,371 4.746 1,497 129 6,281 2,119 155 250 8,116 2,975 160 (20) (246) (829) (316) 81 (6) (119) (1,193) (1,039) 1,759 706 4,433 (3,692) (2,187) (1,755) 4.294 913 7,401 (6,109) 11,920 (1,426) (3.367) 5,030 1.724 11,931 (9.976) 16,443 6.842 CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD OPERATING ACTIVITIES: Net income (loss) Adjustments to reconcile net income (loss) to net cash from operating activities: Depreciation of property and equipment, including internal-use software and website development, and other amortization, including capitalized content costs Stock-based compensation Other operating expense, net Other expense (income), net Deferred income taxes Excess tax benefits from stock-based compensation Changes in operating assets and liabilities: Inventories Accounts receivable, net and other Accounts payable Accrued expenses and other Additions to unearned revenue Amortization of previously unearned revenue Net cash provided by (used in) operating activities INVESTING ACTIVITIES: Purchases of property and equipment, including internal-use software and website development, net Acquisitions, net of cash acquired, and other Sales and maturities of marketable securities Purchases of marketable securities Net cash provided by (used in) investing activities FINANCING ACTIVITIES: Excess tax benefits from stock-based compensation Proceeds from long-term debt and other Repayments of long-term debt and other Principal repayments of capital lease obligations Principal repayments of finance lease obligations Net cash provided by (used in) financing activities Foreign currency effect on cash and cash equivalents Net increase (decrease) in cash and cash equivalents CASH AND CASH EQUIVALENTS, END OF PERIOD SUPPLEMENTAL CASH FLOW INFORMATION: Cash paid for interest on long-term debt Cash paid for interest on capital and finance lease obligations Cash paid for income taxes, net of refunds Property and equipment acquired under capital leases Property and equipment acquired under build-to-suit leases 4,893) (979) 3,349 (2.542) (5.065) 4.589) (795) 3,025 (4.091) (6,450) (6,737) (116) 4,733 (7.756) (9,876 6.359 (513) (1.285) (135) 4,432 (310) 5.899 14,557 119 353 (1,652) (2.462) (121) (3.763) (374) 1.333 15,890 829 621 (354) (3.860) (147) (2,911) (212) 3.444 19,334 $ $ 91 $ 86 325 $ 153 273 4.717 177 4.008 920 290 206 412 5,704 1,209 544

Answer 1

FREE CASH FLOW OF EQUITY

Free cash flow (FCF) represents the cash a company generates after accounting for cash outflows to support operations and maintain its capital assets. Unlike earnings or net income, free cash flow is a measure of profitability that excludes the non-cash expenses of the income statement and includes spending on equipment and assets as well as changes in working capital from the balance sheet.

Formula = Cash from operating activities

+ Interest Expense

- Tax shield on interest

- Capital Expenditure

AMAZON (31^st December, 2016):

= 16,443 + 484 – (6,737 + 116 + 7,756)

= $ 2,318 Mn.

CONCLUSIONS:

• All though the cash flow is positive and in thousand million figures, but is not adequate when compared with the status of operations and investments.
• Amazon Inc. consumed a large of its operation cash flow for investment purposes and thus not much is left for other activities.
• The Cash Management Department must focus on efficient utilization of its cash resources in order to keep adequate reserves of cash at the end of the fiscal period.

WALMART (31^ST December, 2017):

= 31,530 + 2,267 – (10,619 + 1,901 + 2,463 + 122)

= $ 18,692 Mn.

CONCLUSIONS:

• The operating cash flow of Walmart is quite huge and is capable of fulfilling all requirements of cash all over the enterprise.
• Its investments are in control and thus, a substantial portion of its operating cash inflow is available for other purposes.
• Here, the management needs to focus on opportunity cost of its cash reserves as huge stock of idol cash can be termed as a financial loss of opportunity foregone.