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Technology Stocks : Cisco Systems, Inc. (CSCO) -- Ignore unavailable to you. Want to Upgrade?

To: Elroy who wrote (67262)	3/9/2005 4:15:21 PM
From: Stock Farmer	Read Replies (1) \| Respond to of 77400

"True, but that's not the upcoming change, right?" Yes, what I described as an implementation of your suggestion (report what they would have spent) is precisely the basis of the upcoming change. Companies are being required to recognize a stock option compensation expense that is equal to what the purchase price of the options would be on the open market, at the same time forcing companies to use the tool that the market uses to value options rather than any internal hokus-pokus that might conceivably be invented. "Also, the income statement and cash flow statement get fuzzy if CSCO reported the cash it would have paid on the income statement, but didn't actually pay, so it doesn't appear on the cash flow statement." I don't understand your concern. There is nothing new with CISCO making adjustments on the cash flow statement for non-cash items reported in the income statement. In "cash flow from operations" you will see "net income", and then right underneath a section entitled "adjustments for non-cash items". Deferred revenue shows up as cash flow but not as income; depreciation shows up as a loss but not as cash flow; various provisions, income taxes, inventory valuations, changes in accounts receivable and accounts payable... blah blah blah. All affect cash differently than they affect income. Any reported stock option expense will be added back right there, along with all the other "expenses" that also didn't have an identical cash component for one reason or another. Such as "stock based compensation expense" that you are already starting to see recognized by companies that give an outright gift of stock. Personally, I think stock options are a good tool and the most efficient way of using equity financing to subsidize wages. Which I personally think is a great thing. Particularly when cash is less plentiful than wages would otherwise require. However, it's been abused. The root cause of the problem is that the general investing public doesn't know how much the equity market is subsidizing wages. Or in other words, they haven't got a clue what it is really costing to achieve the reported results. While your suggestion will make the cost perfectly obvious and unavoidable, therefore addressing root cause, it also obliterates a very effective tool at the same time. Another approach is to go right to the root cause and force companies to put the cost right in the faces of their investors: on the income statement where compensation belongs. Sort of like noticing that since people get injured when improperly positioned folding ladders collapse. One solution is to pass a rule that people shouldn't be able to buy them in the first place and instead have to use the kind that are rigid. I prefer slapping yet another orange warning label on the ladder so I can still fold it to store and transport effectively.