Assignment 2

  Statement of Cash Flows  

 
 

Supplemental Data

 Financial data and excerpts from Amazon’s 1997 and 2005 Annual Reports (available from
Canvas>Files>Assignments>02 – Amazon.com>02 – Supplement – Amazon.pdf).

Required Questions

You may collaborate in groups of up to four registered students (collaboration across sections is
permitted) in formulating your answers to the following questions. If you choose to collaborate with
others on this assignment, then only one answer sheet, reflecting the consensus of the group, may be
turned in for a grade. Please indicate the name of all group members on the first page of your solution and
submit it to Canvas as either a Microsoft Word or PDF document before 7:00 a.m. on the due date
indicated in the course syllabus. At the beginning of the next class, I will review the answers to questions
that have a circle around the question number. You may be asked to share your answers with the class,
so please have them ready.

1. Examine the time-series pattern of Amazon’s Revenue from inception through December 31, 2005
(see exhibit 2 of the supplement). Based on this evidence, what stage of development in a company’s
life-cycle (introduction, growth, maturity or decline) do you think Amazon is experiencing at the end
of 2005? Clearly state your choice and briefly justify your answer. (1 point)

2. Examine the time-series pattern of Amazon’s Net Income (Loss) from inception through December
31, 2005 (see exhibit 2 of the supplement). Based on this evidence, what stage of development in a
company’s life-cycle (introduction, growth, maturity or decline) do you think Amazon is experiencing
at the end of 2005? Clearly state your choice and briefly justify your answer. (1 point)

3. Examine the time-series pattern of Amazon’s Cash from Operations (CFO) from inception through
December 31, 2005 (see exhibit 2 of the supplement). Based on this evidence, what stage of
development in a company’s life-cycle (introduction, growth, maturity or decline) do you think
Amazon is experiencing at the end of 2005? Clearly state your choice and briefly justify your answer.
(1 point)

ACC 564  Assignment 2 – Questions  Page 1 of 4 

  
4. Examine the time-series pattern of Amazon’s Cash from Investing (CFI) from inception through
December 31, 2005 (see exhibit 2 of the supplement). Based on this evidence, what stage of
development in a company’s life-cycle (introduction, growth, maturity or decline) do you think
Amazon is experiencing at the end of 2005? Clearly state your choice and briefly justify your answer.
(1 point)

5. Examine the time-series pattern of Amazon’s Cash from Financing (CFF) from inception through
December 31, 2005 (see exhibit 2 of the supplement). Based on this evidence, what stage of
development in a company’s life-cycle (introduction, growth, maturity or decline) do you think
Amazon is experiencing at the end of 2005? Clearly state your choice and briefly justify your answer.
(1 point)

6. For the fiscal year ending on December 31, 2005, estimate: 

(i) the amount of cash Amazon received from (paid to) its customers, and
(ii) the amount of cash Amazon received from (paid to) its suppliers for inventory.
In formulating your answer, refer only to Amazon’s 2005 Income Statement (exhibit 8), 2005
Balance Sheet (exhibit 9) and 2005 footnote excerpts (exhibit 10). You should assume that the
balance of Other Current Assets did not change during the 2005 fiscal year. Please provide a dollar
amount for both. (4 points)  

7. For the fiscal year ending on December 31, 1997, do the changes in Amazon’s Inventories and
Accounts Payable balances reported on the Balance Sheet articulate (i.e., agree) with the information
reported on the Statement of Cash Flows? Clearly state either “yes” or “no.” If your answer is “no,”
then provide at least one potential explanation, citing specific evidence from Amazon’s 1997 financial
statement information (exhibits 3–6), for why they do not articulate. (2 points)

8. For the fiscal year ending on December 31, 2005, do the changes in Amazon’s Inventories and
Accounts Payable balances reported on the Balance Sheet articulate (i.e., agree) with the information
reported on the Statement of Cash Flows? Clearly state either “yes” or “no.” If your answer is “no,”
then provide at least one potential explanation, citing specific evidence from Amazon’s 2005 financial
statement information (exhibits 7–10), for why they do not articulate. (2 points)

9. Construct a direct-method operating section of the Statement of Cash Flows for Amazon’s fiscal year
ending on Dec. 31, 1997. The template on the following page may be useful in answering this
question. (7 points)

   

ACC 564  Assignment 2 – Questions  Page 2 of 4 

 Template for Question 9

INCOME STATEMENT  ADJUSTMENTS  CASH FROM OPERATIONS (“DIRECT” METHOD) 

Please provide a detailed explanation of the adjustments made to “Net

Net sales $ 147,758 ± sales” to estimate “Cash received from (paid to) customers” = Cash received from (paid to) customers: $ Provide amount 

Please provide a detailed explanation of the adjustments made to

Cost of sales (118,945) ± “Cost of sales” expense to estimate “Cash received from (paid to) = Cash received from (paid to) suppliers: $ Provide amount 
suppliers”

Please provide a detailed explanation of the adjustments made to

Marketing and sales (38,964) ± “Marketing and sales” expense to estimate “Cash received from (paid = Cash received from (paid for) marketing: $ Provide amount 
for) marketing”

Please provide a detailed explanation of the adjustments made to

Product development (12,485) ± “Product development” expense to estimate “Cash received from = Cash received from (paid for) product development: $ Provide amount 
(paid for) product development”

Please provide a detailed explanation of the adjustments made to

SG&A expense (1,831) ± “SG&A expense” to estimate “Cash received from (paid for) SG&A” = Cash received from (paid for) SG&A: $ Provide amount 

Please provide a detailed explanation of the adjustments made to

Interest income (expense) 1,619 ± “Interest income (expense)” to estimate “Cash received from (paid to) = Cash received from (paid to) interest: $ Provide amount 
interest”

Please provide a detailed explanation of the adjustments made to

Depreciation expense (3,388) ± “Depreciation expense” to estimate “Cash received from (paid for) = Cash received from (paid for) depreciation: $ Provide amount 
depreciation”

Please provide a detailed explanation of the adjustments made to

Amortization expense (1,354) ± “Amortization expense” to estimate “Cash received from (paid for) = Cash received from (paid for) amortization: $ Provide amount 
amortization”

Net Income (Loss) $ (27,590)   Cash from Operations (CFO): $ Provide amount 

NOTE: Amazon’s 1997 Income Statement (exhibit 4) reports $6,573 in Selling, general and administrative expenses. On the Income Statement given as part of this
template (see above), total Selling, general and administrative is separated into three line items: (i) SG&A expense of $1,831, (ii) Depreciation expense of
$3,388, and (iii) Amortization expense of $1,354.

ACC 564  Assignment 2 – Amazon    Page 3 of 4 

Questions for discussion during the next class (Revenue Recognition)
As preparation for our next class, please think about how you would respond to the following questions.
We will use these questions as a basis for our discussion of Revenue Recognition during the next class.
You are permitted (and encouraged) to discuss and/or debate your responses with other students, but you
are not required to submit your answers. However, you may be asked to share your answers with the
class, so please have them ready.

 Why do we care about Revenues? Think of situations in which Revenues are relatively more
important than Net Income.

For the remaining questions below, consider Apple’s iPod Touch, which Steve Jobs once
described as “training wheels for the iPhone.” The iPod Touch is basically an iPhone with
Wi-Fi connectivity, but with neither a phone component nor a need for a contract with a
service provider. Assume that you walk into an Apple store on Sept. 5, 2007 (its debut
date), pay $200 in cash for a new iPod Touch, and then walk out of the store with it.

                

 What did you just purchase? Think of everything that you received for your $200.

 Which of the following two revenue recognition policies best reflects the “economic reality” of your
purchase? Why?
(1) Immediate revenue recognition: Apple recognizes 100% of the $200 as revenue in the fiscal
year that the product was sold to you.

(2) Delayed revenue recognition: Apple recognizes 50% of the $200 as revenue in the fiscal year that
the iPod Touch was sold to you and defers the remaining 50% of the
revenue until the next fiscal year.

 If you were the CEO of Apple, which of the two revenue recognition policies (above) would you
prefer? Why?

ACC 564  Assignment 2 – Amazon  Page 4 of 4