Management’s Discussion and Analysis of Financial Condition and Results of Operations

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

The form 10-k contains forward looking statements in the jurisdiction of 1995 private securities litigation reform act. All the statement apart from historical facts, addition to guidelines, business financial position is forward looking. Terminologies such as expects, projections, and future are used to describe forward looking statements. In any case, forward looking statements present current management prospects and they are naturally uncertain. Actual financial results may differ materially due to a number of factors such as changes in foreign exchange rates, fluctuations in international economic climate, global events consumer spending, development of electronic commerce, competition, potential changes in operating results, time Amazon.com invests in new opportunities, global expansion and development, management of risk inventory, strategic operations , payment risks, seasonality, acquisition, inventory management risks and competition. Consequently, the current worldwide conditions increase a number of risks. These risks could make results to fluctuate considerably from the prospects of management (Aboody, D., M. E. Barth and R. Kasznik 2012). The company’s main source of income is sale of a variety of goods as well as services. These products mainly include merchandise and content acquired for resale from suppliers and third party vendors. In generally, the company recognizes gross income from products sold from inventory as products and net share of income is recognized from products sold by other vendors as service sales. On the hand, the company offers services including fulfillment, subscription of digital material, electronic advertising marketing and promotion. The financial objective is centered on long term and sustainable increase of cash flow[1] per every share. Cash flow is triggered by increased operating revenue and effectively controlling the operating resources[2] and capital expenses. Increase in operating capital stems from growth in sales and effectively controlling operating expenses, through investments made by the company in the long term strategic projects. To enhance the volume of sales, management focuses on increasing all client needs such as reducing prices, increasing availability, improving product categories, faster and effective service delivery, increasing reliability and improved selection. Moreover, the company seeks to effectively control dilution of shareholders as they maintain flexibility in the issuance of shares like funding, aligning employee rewards and acquisitions. Stock units are used as a platform for equity reward since; the company thinks that in this manner they are able to support the interests of workers and shareholders (Aboody, D., M. E. Barth and R. Kasznik 2012). During the assessment of shareholder dilution, the company integrates both vested as well as unvested stock, without considering projected forfeitures. As of December 31, 2011 and 2010, outstanding shares plus stocks awarded was 468 and 465 million respectively. The company’s fixed expenditures include all expenses used in the operations of technology and AWS; to increase, develop and add more features to the website, Kindle appliances and develop fulfillment centers. Basically, variable expenses fluctuation with volume of sales, whereas fixed expenses increase based on the timing, geographical development, and category development. To minimize variable expenses on unit basis and help the company reduce prices, they seek to enhance sourcing, raise discount and minimize defects during production. And to reduce increase in fixed expenses, the company aims at enhancing efficiency in all their processes (Aboody, D., M. E. Barth and R. Kasznik 2012).

Based on the company strategic model, it is in position of turning inventory so as to have an income generating operating cycle[3]. In 2011, 2010, and 2009, inventory turnover[4] was approximately 10, 11 and 12 respectively. Changes in turnover are expected because it is affected by many aspects such as in-stock inventory, expansion in new geographies, level of outsourcing fulfillment and product mix. Additionally, in 2011, 2010 and 2009, accounts payable days[5] were 74, 72 and 76. However, this is likely to change due to a number of reasons including seasonality, mixing volume of sales by other vendors, fluctuations in payment terms and conditions.

The company reports its financial results in USD that fluctuates considerably in exchange rates affecting results as well as consolidated patterns. For instance, weakening of the USD means that the company’s operation costs and consolidated sales in the global locations will be greater. Conversely, if the dollar strengthens operation costs and consolidated sales in the global locations will reduce tremendously. As such, the company’s diversification move is beneficial to its shareholders. Addition, the company thinks that it is important to assess all operating outcomes and increases prior to and after the currency fluctuations. Re-evaluation of inter-company balances can contribute to considerable benefits and charges related to the effect of exchange rates. Volatilities in currency may go on that is likely to positively or negatively affect recorded financial results as well as consolidated patterns (Aboody, D., M. E. Barth and R. Kasznik 2012).

Critical Accounting Judgments

The writing of financial reports in tandem with widely approved standards of the United States (“GAAP”) demands expectations and assumptions that affect the reported amounts of assets as well as liabilities, earnings and costs, and associated reporting of contingent assets and liabilities in the consolidated financial reports and associated notes (Aboody, D., M. E. Barth and R. Kasznik 2012). The SEC has identified firms’ critical financial policies as the ones that are most significant to the depiction of the firms’ fiscal status and outcomes of operations and which demand the company to make its most complex and subjective judgments, normally as an outcome of the need to make approximations of matters that are intrinsically tentative. Following this description, it is necessary for the company to put into consideration critical financial reporting policies and judgments highlighted below.

Inventories

Records, comprising of items accessible for sale, are elementarily accounted for by use of FIFO or first-in-first-out approach, and are prized at the lower of cost or market value. This analysis demands us to make judgments, anchored on presently-accessible information, concerning the likely approach of disposition, like through sales to individual clients, returns to product merchants, or liquidations, as well as anticipated recoverable values of each cluster. These statements regarding future outlook of records are intrinsically tentative. As a determinant of kindliness, for every one percent of additional record valuation approvals at December 31, 2011, the company would likely have recorded an extra cost of sales of about $50 million.

As of December 31, 2011, operations were as follows:

Description of Use	Square Footage (1)		Operating Segments	Lease Expirations (1)
	(in thousands)
Office lease		3,416	North America	From 2012 through 2026
Office lease		837	International	From 2012 through 2021

Sub-total		4,253

Fulfillment and other		26,364	North America	From 2012 through 2026
Fulfillment and other		17,690	International	From 2012 through 2025

Sub-total		44,054

Total		48,307

The statement above is a representation of the sum leased space exclusive of sub-leased space. It is literally a lease of corporate assets in various regions.

Goodwill

Goodwill is evaluated in terms of impairment yearly or time and again when an occurrence happens or conditions are altered indicating that the carrying cost might not be recoverable. During annual test, goodwill is then tested against impairment by first comparing the inventory estimate of total assets to the moderate value of the accounting units. In the event that fair values comes way below the book value or qualitative attributes suggests that it is somewhat probable. Another test is executed to calculate the amount of impairment as the disparity between the estimated fair value of benevolence and the carrying value (Aboody, D., M. E. Barth and R. Kasznik 2012). Fair value is therefore approximated by accounting unites that hinge on discounted cash flows. Futuristic financial projections are centered on the best estimate of future net sales and functional expenses, anchored mainly on anticipated cluster expansion, cost, market segment share, and fiscal circumstances. Some approximates of discounted cash flows entail businesses as well as geographies with controlled fiscal history and increasing income replicas. Variations in these forecasts could significantly alter the amount of impairment registered (Aboody, D., M. E. Barth and R. Kasznik 2012). It is important to note that monetary and credit market volatility directly affects fair value determinants through our weighted aggregate expenses of running costs used in determining discount rate as well as market capitalization. In times of uncertainty, significant judgment should be applied to determine whether credit or stock price variations are a transitory swing or a lasting trend. As a determinant of sensitivity, a protracted twenty percent decrease from December 31, 2011; ending stock price would not be a benchmark of possible destruction (Aboody, D., M. E. Barth and R. Kasznik 2012).

Stock-Based Compensation

Compensation expense is measured at fair value and recognizes it as reparation outlay over the service period for awards required to vest. Fair value of controlled stock units is quantified based on share and stock common price. Approximations of stock awards expected to vest expects scrutiny for the figure that is surrendered. For quarterly estimates, 1% increase to the approximated give up rate would amount to $24 million effect on the 2011 operating revenue. In this regard the accelerated technique, and not the straight-line approach, is employed for acknowledging reimbursement cost. By use of this approach, over fifty percent of the recompense cost is disbursed during the first year of a vest season of four years (Aboody, D., M. E. Barth and R. Kasznik 2012). The impact merged statements of operations from variations in exchange rates versus the U.S. Dollar are below (in millions, except per share statistics):

	Year Ended December 31, 2011						Year Ended December 31, 2010							Year Ended December 31, 2009
	At Prior Year Rates (1)		Exchange Rate Effect (2)		As Reported		At Prior Year Rates (1)		Exchange Rate Effect (2)			As Reported		At Prior Year Rates (1)		Exchange Rate Effect (2)			As Reported
Net sales	$	46,985	$	1,092	$	48,077	$	34,290	$	(86	)	$	34,204	$	24,691	$	(182	)	$	24,509
Operating expenses		46,176		1,039		47,215		32,856		(58	)		32,798		23,522		(142	)		23,380
Income from operations		809		53		862		1,434		(28	)		1,406		1,170		(41	)		1,129

The statement above stands for the end results that would have culminated into had exchange rates in the reported phase been analogous as those in impact in the similar before year phase for operating outcomes. It is also a symbol of an increase or decrease in documentation totals stemming from variations in exchange rates from those in effect in the comparable year phase for running outcomes.

Income Taxes

The company is also answerable to income taxes in both the United States and various foreign authorities. Critical analysis is therefore expected in reviewing and approximating our tax positions and determining our provision and tax accruals for such taxes (Aboody, D., M. E. Barth and R. Kasznik 2012).

References

Aboody, D., M. E. Barth and R. Kasznik. (2012). Firms’ voluntary recognition of stock- based compensation expense. Journal of Accounting Research (May): 123-150.

Free cash flow, a non-GAAP financial measure, is defined as net cash provided by operating activities less purchases of fixed assets, including capitalized internal-use software and website development, both of which are presented on our consolidated statements of cash flows. See “Results of Operations—Non-GAAP Financial Measures” below.

²	Working capital consists of accounts receivable, inventory, and accounts payable.

³	The operating cycle is number of days of sales in inventory plus number of days of sales in accounts receivable minus accounts payable days.

⁴	Inventory turnover is the quotient of trailing-twelve-month cost of sales to average inventory over five quarter-ends.

⁵	Accounts payable days, calculated as the quotient of accounts payable to current quarter cost of sales, multiplied by the number of days in the current quarter.

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