ACCOUNT 249 Spring 2017 Chapter 15: Amazon.com, Inc. Graded Homework Assignment 16 points Monday, May 1, 2017: Sections 01, 03, 06, 07, 09, 10, 11 Tuesday, May 2, 2017: Sections 02, 04, 05, 08, 12 Assignment Learning Goals This assign

ACCOUNT 249
Spring 2017
Chapter 15: Amazon.com, Inc. Graded Homework Assignment
16 points
Monday, May 1, 2017:  Sections 01, 03, 06, 07, 09, 10, 11
Tuesday, May 2, 2017:  Sections 02, 04, 05, 08, 12

Assignment Learning Goals
This assignment is designed to help you learn how to compute and interpret financial ratios that managers use to
assess
1. Liquidity
2. Asset management.
3. Debt management.
4. Profitability.
5. Market performance.

 
Required
1. Read the information about Amazon.com, Inc. presented on page 2 as well as the financial statements
presented on pages 3 and 4.
2. Use the tables presented on pages 5, 6, and 7 to organize the information you have been given.
3. Use concepts presented in Chapter 15 to complete the required calculations.


Guidelines and Policies for Graded Assignments
1. Your assignment can be hand-written or computerized using Word or Excel.  However, you must present your
answer using the charts presented on pages 5, 6, and 7.  Five points will be deducted from your score if
your answer is not presented using the charts presented on pages 5, 6, and 7.

2. All assignments will be collected at the beginning of the class period in which the assignment is due. 

3. All assignments must be turned in during the class period in which they are due in order to receive full credit. 
As stated in the course syllabus, grades will be reduced by 25% for assignments turned in by midnight of the
day they are due.  No credit will be given for any assignment turned in after the day on which it is due unless
the student discusses a specific situation with the instructor before the assignment is due.  

4. Be sure your name and section number is on the assignment you turn in.


 
1
 
 
Chapter 15: Amazon.com, Inc. Graded Homework Assignment
16 points

This spring, Amazon.com, Inc. issued their annual report for 2016.  The balance sheet and statement of operations
(income statement) included in that report are presented on pages 3 and 4.  The price per share data of Amazon’s
stock for 2014, 2015, and 2016 is presented on page 4.

In addition to financial data, all annual reports include a large of amount of text designed to present management’s
opinion about various issues and to provide insights into the reported financial information.  For example, on page
16 of the report, management states that they have never declared or paid cash dividends on Amazon’s common stock.

Effect of Amazon’s Operating Cycle on Cash Balances
On page 9 of the annual report, management makes the following statement concerning Amazon’s financial
position at December 31
st
, the end of their fiscal year.
 
We generally have payment terms with our retail vendors that extend beyond the amount of time necessary to collect
proceeds from our consumer customers. As a result of holiday sales, as of December 31 of each year, our cash, cash
equivalents, and marketable securities balances typically reach their highest level (other than as a result of cash flows
provided by or used in investing and financing activities). This operating cycle results in a corresponding increase in
accounts payable as of December 31. Our accounts payable balance generally declines during the first three months of
the year, resulting in a corresponding decline in our cash, cash equivalents, and marketable securities balances.


Effect of Amazon’s Operating Cycle on Cash Flow
Amazon receives cash from its sales relatively quickly because most of the customers use credit cards.  On page
19, management states the company has “a cash-generating operating cycle” computed as follows:
 
Number of days of sales in inventory + Number of days of sales in accounts receivable - Accounts payable days.

Management goes on to make the following statement:
 
Because of our model, we are able to turn our inventory quickly and have a cash-generating operating cycle. On average, our high
inventory velocity
1
 means we generally collect from consumers before our payments to suppliers come due. We expect variability
in inventory turnover over time since it is affected by numerous factors, including our product mix, the mix of sales by us and by
third-party sellers, our continuing focus on in-stock inventory availability and selection of product offerings, our investment in new
geographies and product lines, and the extent to which we choose to utilize third-party fulfillment providers. We also expect some
variability in accounts payable days over time since they are affected by several factors, including the mix of product sales, the mix
of sales by third-party sellers, the mix of suppliers, seasonality, and changes in payment terms over time, including the effect of
balancing pricing and timing of payment terms with suppliers.

On page 22, management makes the additional statement about Amazon’s cash flows.
 
On average, our high inventory velocity means we generally collect from consumers before our payments to suppliers come due.

 
Required:
1. Use the tables on pages 5, 6, and 7 to calculate the 11 required liquidity, debt management, asset
management, profitability, and market performance ratios for 2015 and 2016.  Each ratio table is worth 1 point.

2. Answer the question asked for each set of ratios based on your calculations and the information provided. 
Each question is worth 1 point.
 
                                                            
1
.
 “High inventory velocity” means Amazon.com turns over its inventory items quickly.
2
 
 
AMAZON.COM, INC.*
CONSOLIDATED BALANCE SHEETS
(in millions, except per share data)
    
December 31 2014  2015  2016
ASSETS 
 
Current assets:     
Cash and cash equivalents $14,557  $15,890  $19,334
Accounts receivable, net 5,612  5,654  8,339
Marketable securities 2,859  3,918  6,647
Inventories 8,299  10,243  11,461
Total current assets 31,327   35,705   45,781
Property and equipment, net 16,967  21,838  29,114
Goodwill 3,319  3,759  3,784
Other assets 2,892  3,445  4,723
Total assets $54,505  $64,747  $83,402
     
LIABILITIES AND STOCKHOLDERS’ EQUITY    
Current liabilities:     
Accounts payable $16,459  $20,397  $25,309
Accrued expenses and other 9,807  10,372  13,739
Unearned revenue 1,823   3,118   4,768 
Total current liabilities 28,089  33,887  43,816
Long-term debt 8,265  8,227  7,694
Other long-term liabilities 7,410    9,249   12,607 
Total liabilities $43,764  $51,363  $64,117
     
Stockholders’ equity:    
Common stock, $0.01 par value:     
Authorized shares - 5000    
Issued shares - 488, 494 and 500     
Outstanding shares - 465, 471 and 477 5  5  5
Treasury stock, at cost (1,837)  (1,837)  (1,837)
Additional paid-in capital 11,135  13,394  17,186
Accumulated other comprehensive loss (511)  (723)  (985)
Retained earnings 1,949  2,545   4,916
Total stockholders’ equity $10,741  $13,384  $19,285
Total liabilities and stockholders’ equity $54,505  $64,747  $83,402

 

 
* The formatting of this financial statement has been modified to make it appropriate for classroom use. 
The 2014 data was added for this assignment and does not appear in Amazon’s 2016 annual report.

 
 
3
 


 
 
 
AMAZON.COM, INC.*
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
     
Year Ended December 31 2014   2015   2016
Net product sales $70,080  $79,268   $94,665
Net service sales 18,908   27,738   41,322
Total net sales 88,988  107,006  135,987
Cost of sales 62,752    71,651   88,265
Gross margin 26,236  35,355  47,722
Operating expenses:     
Fulfillment 10,766  13,410  17,619
Marketing 4,332  5,254  7,233
Technology and content 9,275  12,540  16,085
General and administrative 1,552  1,747  2,432
Other operating expense, net 133   171   167
Total operating expenses 26,058   33,122   43,536
Operating income 178  2,233  4,186
Interest expense (171)  (409)  (384)
Other income (expense) net (118)   (256)   90
Income (loss) before income taxes (111)  1,568  3,892
Provision for income taxes (130)   (972)   (1,521)
Net income (loss) $(241)   $596    $2,371
     
Basic earnings per share (0.52)  $1.28  $5.01
     
* The formatting of this financial statement has been modified to make it appropriate for classroom use.
 
***********************************************************

 
Amazon.com Common Stock Market Prices
December 31
st
 2014 2015 2016
 $204 $257 $272

 
4
 
 
Chapter 15: Amazon.com, Inc. Graded Homework Assignment
 

Student Name:               Section Number:     

LIQUIDITY RATIOS
 
Table 1 Current Ratio Calculation Answer
2014 N/A $1.12
2015  
2016 
 

Table 2 Acid-Test Ratio Calculation Answer
2014 N/A $0.82
2015  
2016 
 
Based on your calculations for these two ratios and the information provided, in which direction is
Amazon.com’s level of liquidity trending?
 
      Getting better      Getting worse 

 

DEBT MANAGEMENT RATIOS

Table 3 Times Interest Earned Calculation Answer
2014 N/A $1.04
2015  
2016 
 

Table 4 Debt to Equity Calculation Answer
2014 N/A $4.07
2015  
2016  

Based on your calculations for these two ratios and the information provided, in which direction is
Amazon.com’s amount of debt trending?
 
     Going up      Going down
5
 
 
ASSET MANAGEMENT RATIOS
 
Table 5 Accounts Receivable Turnover Calculation Answer
2014/2015  
2015/2016 
 


 



 
Table 6 Average Collections Period Calculation Answer
2014/2015  
2015/2016  
Table 7 Inventory Turnover Calculation Answer
2014/2015  
2015/2016 
 


 
Table 8 Average Sale Period Calculation Answer
2014/2015  
2015/2016 
 

Based on your calculations for these four ratios, in which direction is Amazon.com’s operating cycle
trending?

     Getting shorter      Getting longer


 
6
 
 
PROFITABILITY RATIOS
 
Table 9 Net Profit Margin Calculation Answer
2014 N/A -0.27%
2015  
2016 
 

 
Table 10 Return on Equity Ratio Calculation Answer
2014/2015  
2015/2016  

Based on your calculations and the information provided, in which direction is Amazon.com’s
profitability trending?

  Going up     Going down




 
MARKET PERFORMANCE RATIOS
Table 11 Book Value Per Share Calculation Answer
2014 N/A $23.10
2015  
2016 
 

Based on your calculations and the information provided, in which direction is Amazon.com’s
book value per share tending?

    Getting better     Getting worse

 
7