Prepare a direct-method operating section of the statement of cash flows for 1997 using the information available in the balance sheet and income statement (Exhibits 3 and 4), as well as the supplementary cash flow information (Exhibit 5). The below attached template on the following page may be useful in answering this question. Be sure to explain your answers in summary form and list the additions/subtractions and where from the income statement and balance sheet these numbers are being pulled from for your final calculation (explain your logic).

TEMPLATE BELOW:

Income Statement			Adjustments			Cash Flow (Direct-method)
Net sales	147,758	+/			=	Cash from Customers
Cost of sales	118,945	+/			=	Cash Paid for Inventory
Marketing and sales	38,964	+/			=	Cash paid for marketing
Product development	12,485	+/			=	Cash paid for product dev.
General and administrative	1,831	+/			=	Cash flow paid for G&A
Interest income	1,898	+/			=	Interest received
Interest expense	279	+/			=	Interest Paid
Depr. and amort.	3,388	+/			=
Amort. of compensation	1,354	+/			=
Net Loss	27,590					CFO

(Note that the template disaggregates total General and administrative expenses reported in the Statement of Operations into three categories: (i) General and administrative, (ii) Depreciation and amortization, and (iii) Amortization of compensation)

Exhibit 3: 1997 Income Statement AMAZON.COM, INC. STATEMENTS OF OPERATIONS (IN THOUSANDS, EXCEPT PER SHARE DATA) YEARS ENDED DECEMBER 31, 1997 1996 1995 - $ Net sales.... Cost of sales.. $147,758 118, 945 $15, 746 12,287 511 409 - 28,813 3,459 102 Gross profit..... Operating expenses: Marketing and sales. Product development... General and administrative.. 38,964 12,485 6,573 6,090 2,313 1,035 200 171 35 Total operating expenses. Loss from operations.. Interest income.. Interest expense. 58,022 (29,209) 1,898 (279) 9,438 (5,979) 202 406 (304) 1 Net loss.... $ (27,590) $(5,777) $ (303) ==== = ===== ======= Pro forma basic and diluted loss per share.. $ (1.27) $ (0.31) $ (0.02) Shares used in computation of pro forma basic and diluted loss per share... 21,651 18, 544 14,394 Exhibit 4: 1997 Balance Sheet AMAZON.COM, INC. BALANCE SHEETS (IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) DECEMBER 31, 1997 1996 ASSETS $ 6,248 Current Assets: Cash and cash equivalents.. Short-term investments. Inventories.. Prepaid expenses and other. $109,810 15, 256 8,971 3,298 571 321 Total current assets Fixed assets, net.. Deposits... Deferred charges.. 137, 335 9,265 166 2,240 7,140 985 146 $149,006 $ 8,271 ===== ======= Total assets.. LIABILITIES AND STOCKHOLDERS' EQUITY Current Liabilities: Accounts payable... Accrued advertising.. Accrued product development. Other liabilities and accrued expenses Current portion of long-term debt.. $ 32,697 3,454 $ 2,852 598 500 920 6,167 1,500 4,870 43,818 76,521 181 Total current liabilities. Long-term portion of debt.... Long-term portion of capital lease obligation. Stockholders' Equity: Preferred stock, $0.01 par value: Authorized shares -- 10,000,000 Issued and outstanding shares -- none and 569, 396 shares in 1997 and 1996, respectively. Common stock, $0.01 par value: Authorized shares 100,000,000 Issued and outstanding shares 23,937, 169 and 15, 900, 229 shares in 1997 and 1996, respectively. Additional paid-in capital. Deferred compensation. Accumulated deficit. -- 6 239 63,792 (1,930) (33,615) 159 9,873 (612) (6,025) Total stockholders' equity. 28, 486 3, 401 Total liabilities and stockholders' equity..... $149,006 $ 8,271 EE ======= Exhibit 5: Supplementary 1997 cash flow information (all numbers in thousands): Property Plant and Equipment PPE includes capital leases. Amazon issued $1,000 of common stock in exchange for PPE. Some of Amazon's PPE suppliers provided financing for purchases of fixed assets. Amazon owes one supplier $3,021, which is classified in long-term debt. During 1997, Amazon purchased $181 of PPE (unrelated to the capital lease) that was financed directly by a supplier with short term credit. Even though it relates to investing activities, this liability is recorded on the balance sheet with current liabilities in the balance sheet line item "other liabilities and accrued expenses." The remaining increase in PPE is due to cash purchases of PPE. Other Information Deposits reported in the balance sheet relate to miscellaneous operating activities Amazon issued $75,000 of long-term debt during fiscal year 1997. Financing costs of $2,304 were paid to the underwriters of the debt. This amount was capitalized and will be amortized over the life of the debt. The deferred financing costs appear as a long-term asset with the label "deferred charges." Stock Transactions During 1997, Amazon issued 75,000 to settle the $500 liability recorded on the balance sheet as "accrued product development" at the end of 1996