Erick J. Saidi Accounting 2010 Professor.

Wendy Gunn April 28, 2014 Amazon Analysis Paper Have you ever had a goal that required a lot of hard work? Was the ending result victorious or a learning experience? Well, businesses in the United States also have goals, which are formulated with the sole objective of surpassing the previous years financial success (net income) or unsuccessfulness (net loss). Today, we will take a glimpse and analyze Amazon, an American international electronic commerce company and compare its 2008 financial standpoint to its 2007 and the industry averages, by evaluating some of the companys ratios-an accounting tool, which can be used to measure the solvency, the profitability, and the overall financial strength of a business. The four ratios used will demonstrate Amazons ability to pay its current and long-term liabilities, its ability to sell inventory and collect receivables, profitability, and the attractiveness of an investment. Life is full of unexpected financial moments, something that Amazon and most companies are aware of and sometimes prepared for. When this moment arises, Amazon relies on the Acid-test (quick) ratio, which is designed to indicate the ability to pay current and longterm liabilities. This ratio is expressed by adding up cash, short-term investment and net current receivables and then dividing that by the companys current liabilities. Companies with industry average quick ratios of less than 1 cannot pay their current liabilities and should be looked at with extreme caution. In 2007, Amazons ability to pay all of its liabilities was .96, with an increase to 1.03, in 2008, which wasnt a glamorous leap. Amazons low 2007 percentage could be an indication of low asset amounts, compared to the slightly better 2008 percentage, signifying the possibility that Amazon acquired assets. The biggest advantage of acidtest ratio is that it helps the company in understanding the end results very feasibly. In general, low or decreasing acid- test ratios generally suggest that a company is over-leveraged, struggling to maintain or grow sales, paying bills too quickly, or collecting receivables too slowly. On the

other hand, a high or increasing acid-test ratio generally indicates that a company is experiencing solid top-line growth, quickly converting receivables into cash, and easily able to cover its financial obligations. Such companies often have faster inventory turnover and cash conversion cycles. Today, Amazon has over 30 categories that allow buyers to easily navigate and potentially find what theyre looking for at a fraction of the price. With its increasing flow of products being listed, Amazon needs a good understanding of their inventory, so they use the inventory turnover ratio, which indicates the saleability of inventory-the number of times a company sells its average level of inventory during a year. This ratio is calculated by taking the amount of cost of goods sold and dividing it by the average inventory, in this case, Amazons 2007 and 2008 average inventories. A low turnover implies poor sales and, therefore, excess inventory. A high ratio implies either strong sales or ineffective buying. Once again, Amazon continued to successfully go above the industry average of 10.8. In 2008, Amazons inventory turnover increased to 11.46 compared to 2007, which was 11.1, perhaps this was the reason why amazons 2008 net sales were $19,166,000 compared to $14, 835,000 in 2007. A companys financial health is a very important factor, because it influences and determines the attention of an investor. Would you rather invest your money in company X, a company thats making money and being successful or in company Y, a company thats striving to make a profit and on the verge of closing its doors? Wed all agree that company X is the winner here. A good tool that can help investors and companies determine the percentage of each sales dollar earned as net income, in other words, how much money the company is keeping (profit), is the rate of return on net sales ratio. This ratio is simply calculated by net income divided by net sales. Amazon performed slightly above the 2.72% industry average, by finishing 2007 with 3.21% and 2008 with 3.37%. Over the past years, Amazon has been faced with many competitors, the biggest one being eBay, another e-commerce company, but despite its competitors, Amazon is still in the game, considering that its market price per share rose from $141 in 2007 to $154 in 2008. Its clear, that Amazon is achieving its goal and will perhaps continue to do so, over the years.