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So the short answer to the question is actually that when companies account for stock-based comp. it is a non-cash charge that should be added back in the CFO area. However, because stock-based comp. must be accounted for by the company as a potential benefit (b/c upon exercise the company receives an income tax benefit so they account in the asset side under deferred tax assets) they must account for that benefit on the other side of the equation as well. This happens through retained earnings (NI is reduced by the charge) and there is an add-back (roughly) in paid-in capital. Without the add-back in additional paid-in capital, the model will not balance. Also, when options are exercised, they provide cash which is accounted for through the CFF and occasionally a tax deduction through the CFO. That is what I have found so far. Please let me know if someone at your firm thinks I am right. Read More