Reorganizing the Accounting Statements: In Practice  229
they were not subtracted from revenue in calculating NOPAT. Another 
major noncash expense is share-based employee compensation. Do not 
add back share-based compensation to NOPAT to determine gross cash 
flow. Since employees have a new claim on cash flows, this claim must 
be incorporated into the valuation, either as part of cash flow or as a 
separate calculation. (Share-based employee compensation is discussed 
in Chapter 16.)
EXHIBIT 11.13  Costco: Free Cash Flow and Cash Flow to Investors
$ million
2016
2017
2018
2019
NOPAT
2,598
2,675
3,098
3,818
Depreciation
1,255
1,370
1,437
1,492
Gross cash flow
3,853
4,045
4,535
5,310
Decrease (increase) in working capital
(962)
1,682
684
449
Less: Capital expenditures1
(2,649)
(2,502)
(2,969)
(2,998)
Decrease (increase) in capitalized operating leases
(91)
(208)
28
86
Decrease (increase) in other assets, net of liabilities
20
6
163
(173)
Free cash flow
171
3,083
2,441
2,675
Interest income
41
50
75
126
Other income
39
12
46
52
Taxes related to nonoperating accounts
48
49
32
15
Other nonoperating taxes
77
37
45
92
Decrease (increase) in excess cash
1,740
(844)
(1,229)
(1,962)
Decrease (increase) in tax credit carryforward
—
—
—
(65)
Unexplained foreign-currency translation2
(226)
99
(173)
60
Cash flow to investors
1,890
2,486
1,238
993
Reconciliation of cash flow to investors
Interest expense
133
134
159
150
Operating lease interest
75
57
74
91
Decrease (increase) in long-term debt and capital leases
908
(1,504)
65
(270)
Decrease (increase) in capitalized operating leases
(91)
(208)
28
86
Cash flow to debt and debt equivalents
1,025
(1,521)
326
57
Nonoperating deferred income taxes
(44)
(45)
(58)
(50)
Shares issued for stock-based compensation, net3
(313)
(353)
(330)
(326)
Repurchases of common stock
477
473
322
247
Dividends
746
3,945
936
1,057
Payments to (investments in) noncontrolling interests4
(1)
(13)
42
8
Cash flow to equity and equity equivalents
865
4,007
912
936
Cash flow to investors
1,890
2,486
1,238
993
1 Capital expenditures are reported on the statement of cash flows.
2 Foreign-currency translation adjustment, less the portion allocated to the change of property, plant, and equipment; detailed in Exhibit 11.14.
3 Includes stock-based compensation, stock options exercised, net of the release of vested restricted stock units.
4 Equals net income to nonconsolidated interests minus (plus) the increase (decrease) in noncontrolling interests.

230  Reorganizing the Financial Statements 
Investments in Invested Capital  To maintain and grow their operations, 
companies must reinvest a portion of their gross cash flow back into the busi-
ness. To determine free cash flow, subtract gross investment from gross cash 
flow. We segment gross investment into five primary areas:
1. Change in operating working capital. Growing a business requires invest-
ment in operating cash, inventory, and other components of working 
capital. Operating working capital excludes nonoperating assets, such 
as excess cash, and financing items, such as short-term debt and divi-
dends payable.
2. Capital expenditures, net of disposals. Capital expenditures represent in-
vestments in property, plant, and equipment (PP&E), less the book 
value of any PP&E sold. One way to estimate net capital expenditures 
is to add depreciation to the increase in net PP&E.10 Do not estimate 
capital expenditures by taking the change in gross PP&E. Since gross 
PP&E drops when companies retire assets, the change in gross PP&E 
will often understate the actual amount of capital expenditures.
3. Change in capitalized operating leases. To keep the definitions of NOPAT, 
invested capital, ROIC, and free cash flow consistent, include invest-
ments in capitalized operating leases in gross investment. Capitalized 
operating leases are discussed later in the chapter.
4. Investment in goodwill and acquired intangibles. For acquired intangible 
assets, where cumulative amortization has been added back, you can 
estimate investment by computing the change in net goodwill and ac-
quired intangibles. For intangible assets that are being amortized, use 
the same method as for determining net capital expenditures (by adding 
amortization to the increase in net intangibles).
5. Change in other long-term operating assets, net of long-term liabilities. Sub-
tract investments in other net operating assets. As with invested capital, 
do not confuse other long-term operating assets with other long-term 
nonoperating assets, such as equity investments and excess pension as-
sets. Changes in nonoperating assets need to be evaluated—but should 
be analyzed separately.
For most assets and liabilities, the year-to-year change in a balance sheet 
account will suitably approximate net investment. This will not always be the 
case. Currency translations, acquisitions, write-offs, and accounting changes 
10 If possible, use capital expenditures reported in the accounting statement of cash flows, but only 
after reconciling reported capital expenditures with the change of net PP&E plus depreciation. Capital 
expenditures can differ from net PP&E plus depreciation because of currency translations (discussed 
later in this section), acquisitions, and impairments. Acquisitions should be analyzed separately, and 
impairments should be treated as a nonoperating noncash expense in the income statement.