Many e-tailers (retailers via the Internet) were not profitable in their early years. Analysts who believed in the futures of these firms, therefore, were forced to focus on other positive metrics of performance, such as revenues and gross profit margins (sales less cost of goods sold). The Dow Jones News Service (June 2, 2000) reported that the FASB had recently come out with a new rule requiring companies to include shipping and handling costs, significant in the e-tailing industry, in the cost-of-goods-sold category instead of as part of selling and administrative expense. Even though this reporting requirement had no effect on the bottom line, e-tailers like Amazon.com lobbied aggressively against it.
REQUIRED:
a. Why might analysts be interested in companies that were not recording profits?
b. What specific effect did the new FASB rule have on the income statement of companies like Amazon.com, and why would these companies lobby aggressively against the rule?
c. What impact would this new rule have on the reported cash flows of the company?
d. Do you think that the stock market prices of e-tailers would decrease in response to this ruling by the FASB? Why?