PROBLEM 7–8 The statement of cash flows for Yahoo! is reproduced here:

YAHOO! INC.

Consolidated Statements of Cash Flows YEAR ENDED DECEMBER 31,

(in thousands) Year 8 Year 7 Year 6 Cash flows from operating activities Net income (loss) ................................................................... $ 25,588 $(25,520) $ (6,427)

Adjustments to reconcile net income (loss) to net cash provided by (used in) operating activities:

Depreciation and amortization........................................... 10,215 2,737 639 Tax benefits from stock options ......................................... 17,827 — —

Non-cash charges related to stock option grants and warrant issuances......................................................... 926 1,676 197 Minority interests in operations of consolidated subsidiaries .................................................................. (68) (727) (540)

Purchased in-process research and development.............. 17,300 — —

Other non-cash charge ...................................................... — 21,245 —

Changes in assets and liabilities:

Accounts receivable, net.................................................... $ (13,616) $ (5,963) $ (4,269)

Prepaid expenses............................................................... 2,144 (6,110) (386)

Accounts payable .............................................................. 515 2,425 1,386 Accrued expenses and other current liabilities .................. 16,688 7,404 4,393 Deferred revenue ............................................................... 33,210 2,983 1,665 Due to related parties........................................................ (451) 330 948 Net cash provided by (used in) operating activities.................... 110,278 480 (2,394)

Cash flows from investing activities Acquisition of property and equipment .................................. (11,911) (6,722) (3,442)

Cash acquired in acquisitions ............................................... 199 — —

Purchases of marketable securities ....................................... (471,135) (58,753) (115,247)

Proceeds from sales and maturities of marketable securities........................................................................... 158,350 86,678 43,240 Other investments.................................................................. (5,445) (1,649) (729)

Net cash provided by (used in) investing activities .................... (329,942) 19,554 (76,178)

YEAR ENDED DECEMBER 31, (in thousands) Year 8 Year 7 Year 6 Cash flows from financing activities Proceeds from issuance of Common Stock, net ...................... 280,679 7,516 42,484 Proceeds from issuance of Convertible Preferred Stock .......... — — 63,750 Proceeds from minority investors ........................................... 600 999 1,050 Other...................................................................................... — 1,106 (128)
Net cash provided by financing activities................................... 281,279 9,621 107,156 Effect of exchange rate changes on cash and cash equivalents ............................................................................ 288 (380) (63)
Net change in cash and cash equivalents.................................. $ 61,903 $ 29,275 $ 28,521 Cash and cash equivalents at beginning of year........................ 63,571 34,296 5,775 Cash and cash equivalents at end of year.................................. $125,474 $ 63,571 $ 34,296 Required:

a. Yahoo!’s operations did not produce significant cash flows during Year 6 and Year 7. How does Yahoo! finance its growth in the absence of sufficient operating cash flows?

b. What appears to drive the operating cash flows of Yahoo!?

c. Yahoo! engages in purchases and sales of marketable securities. Why do you believe Yahoo! pursues this activity?

d. Yahoo! reports $33.21 million of deferred revenue. Based on your understanding of Yahoo!’s operations, what do you believe this amount represents?