- What is most unusual about the balance sheet?
An unusual thing about Amazon’s balance sheet is that they are factoring their contingencies into their liabilities. While a company may include these if they are fairly certain they will come to fruition, contingencies are most commonly included as a footnote to the balance sheet rather than factored directly into liabilities.
Because Amazon is factoring these contingencies into their liabilities they are causing for their stockholder equity to be extremely low. Take 2004’s liabilities as an example: their ‘total current liabilities’ are recorded as 1,620 and their ‘long-term debt and other commitments and contingencies’ are recorded as 1,855. On their balance sheet they factor in their contingencies leaving them with a stockholder’s equity of -227. However, if they recorded their balance sheet the way most companies do with their contingencies as a footnote they would have recorded a stockholder’s equity of positive 1628.
- Compute trend percentages for net sales and net income. Use 2003 as the base year. Which trend percentage looks strange? Explain your answer.
2005 2004 2003
Net Sales $8,490 $6,921 $5,264
Net Sales Trend 22.7% 31.5% –
Net Income $359 $588 $35
Net Income Trend -38.9% 1580% –
The trend percentage that looks strange is the drastic increase in net income between 2003 and 2004 while there was only a minimal increase in the net sales. One would assume that the increase between net sales and net income would be relatively similar. 2005 is much closer to a normal scenario than 2004.
While the increase between 2003 and 2004 in net income is drastic an investigation into 2003’s financial records can help us see what caused this dramatic difference. In 2003 Amazon had a ‘total non-operating expense’ of (231), where as in 2004 they recorded a ‘total non-operating expense’ of only (85). This change, in addition to the increased net sales and increased income from operation, allowed them to record a higher net income causing the radical 1580% increase in net income between 2003 and 2004.
- Compute inventory turnover for 2005 and 2004. The inventory balance at December 31, 2003, was $294 million. Do the trend of net income from 2004 to 2005 and the change in the rate of inventory turnover tell the same story or a different story? Explain your answer.
2005 2004 2003
Inventory 566 480 294
Cost of Goods Sold $6451 $5319 –
Avg Inventory for Period 523 387 –
Inventory Turnover 12.3 13.7 –
Net Income $359 $588 –
Net Income Trend -38.9% – –
Yes, the inventory turnover and the net income trend from 2004 and 2005 tell the same story. The net income trend shows a decrease in net income while the inventory turnover rate has also decreased between 2004 and 2005.
The lower inventory turnover means that Amazon has not moved as much inventory between 2004 and 2005 as they did between 2003 and 2004. By not moving as much inventory that means that they have not sold as many products, meaning that Amazon has not recuperated all of the money they have spent on inventory. Thus the decreased inventory turnover correlates into a decreased net income, which is seen in the 2004 to 2005 net income trend.