Amazon.com 2002 Annual Report Download - page 31

""Business Ì Additional Factors That May AÅect Future Results,'' which, along with the following
discussion, describes some, but not all, of the factors that could cause actual results to diÅer signiÑcantly
from management's expectations.
Results of Operations
Critical Accounting Judgments
The preparation of Ñnancial statements in conformity with accounting principles generally accepted in
the United States requires estimates and assumptions that aÅect the reported amounts of assets and
liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the
consolidated Ñnancial statements and accompanying notes. The SEC has deÑned a company's critical
accounting policies as the ones that are most important to the portrayal of the company's Ñnancial
condition and results of operations, and which require the company to make its most diÇcult and
subjective judgments, often as a result of the need to make estimates of matters that are inherently
uncertain. Based on this deÑnition, we have identiÑed the critical accounting policies and judgments
addressed below. We also have other key accounting policies, which involve the use of estimates,
judgments and assumptions that are signiÑcant to understanding our results. For additional information see
Item 8 of Part II, ""Financial Statements and Supplementary Data Ì Note 1 Ì Description of Business
and Accounting Policies.'' Although we believe that our estimates, assumptions and judgments are
reasonable, they are based upon information presently available. Actual results may diÅer signiÑcantly from
these estimates under diÅerent assumptions, judgments or conditions.
SigniÑcant Accounting Policies
Inventories
Inventories, consisting of products available for sale, are valued at the lower of cost or market value,
which requires us to make judgments, based on currently-available information, about the likely method of
disposition (whether through sales to individual customers, returns to product vendors or liquidations), and
expected recoverable values of each disposition category. Based on this evaluation, which is applied
consistently from period to period, we record a valuation allowance to adjust the carrying amount of our
inventories to lower of cost or market value.
Revenue Recognition
We generally recognize revenue from product sales or services rendered when the following four
revenue recognition criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or
services have been rendered, the selling price is Ñxed or determinable and collectibility is reasonably
assured.
We evaluate the criteria outlined in Emerging Issues Task Force (""EITF'') Issue No. 99-19,
""Reporting Revenue Gross as a Principal Versus Net as an Agent,'' in determining whether it is
appropriate to record the gross amount of product sales and related costs or the net amount earned as
commissions. Generally, when we are the primary obligor in a transaction, are subject to inventory risk,
have latitude in establishing prices and selecting suppliers, or have several but not all of these indicators,
revenue is recorded gross. If we are not the primary obligor and amounts earned are determined using a
Ñxed percentage, a Ñxed-payment schedule, or a combination of the two, we generally record the net
amounts as commissions earned.
Product sales, net of promotional discounts, rebates and return allowances, are recorded when the
products are shipped and title passes to customers. Retail items sold to customers are made pursuant to a
sales contract that provides for transfer of both title and risk of loss upon our delivery to the carrier
(commonly referred to as ""F.O.B. Shipping Point''). Return allowances (which reduce product revenue by
our best estimate of expected product returns) are estimated using historical experience.
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