Saturday, February 01, 2014

Profits, Cash Flow and Off-Balance-Sheet Financing (or) How Much Money is a Company Like Amazon REALLY Making?

Matthew Yglesias has an article on Slate titled
The Prophet of No Profit: How Jeff Bezos won the faith of Wall Street.

We are fans of Amazon because of its low prices and quick delivery, but we think it possible that the most popular comment to that posting, by Benton Love, might be somewhat closer to the actual financial corporate reality, as Love emphasizes cash flow and not other accounting parameters, writing inter alia:
"It's important to remember that "profits" are an accounting construct that don't necessarily match how much money a firm is making.... [Amazon]'s asset base produced $5.4 billion more cash than was put into it. One reason why its earnings didn't look so hot is that they had a depreciation "expense" of $3.2 billion, which is an imaginary non-cash expense."
Indeed, one of the major problems of fair and adequate corporate taxation by governments and hence adequate government revenue is that actual corporate profits can be (and often are) much greater than those "officially" and "legally" reported, because of accepted and "legal" accounting practices that essentially permit profits to be "parked" or "deferred".

As one can read at, one example is "Off-Balance-Sheet Financing" -- e.g. pension plans, where earnings could "theoretically" be "parked" in capital expenditures covering pension plan liability, as a means to avoid being declared as profits and being subject to taxation, etc.

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