Amazon.com 2002 Annual Report Download - page 65

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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Ì (Continued)
miscellaneous marketing and promotional agreements. As compensation for the services the Company
provides under these agreements, the Company receives cash, equity securities, or a combination thereof.
Generally, the fair value of the equity consideration received is measured when the agreement is executed,
but to the extent that the equity consideration is subject to forfeiture or vesting provisions and no
signiÑcant performance commitment exists upon execution of the agreement, the fair value of the equity
consideration and corresponding revenue is determined as of the date that the forfeiture provision lapses or
as the vesting provision lapses. Subsequent to initial measurement of fair value, appreciation or decline in
the fair value of such securities will aÅect the Company's ultimate realization of equity securities received
as compensation; however, any such change does not aÅect the amount of revenue to be recognized over
the term of the agreement. The Company generally recognizes revenue from these marketing and
promotional services (including revenue associated with non-refundable advance payments) on a straight-
line basis over the period during which the Company performs services under these agreements,
commencing at the launch date of the service. If the Company receives non-refundable advance payments,
such amounts are deferred for revenue recognition purposes until service commences.
Included in Services segment revenues are equity-based service revenues of $13 million, $27 million
and $79 million for 2002, 2001 and 2000, respectively.
The Company has in the past, and may in the future, amend its agreements with certain of the
companies with which it has commercial agreements to modify future cash proceeds to be received by the
Company, modify the service term of its commercial agreements, or both. Although these amendments
generally do not aÅect the amount of unearned revenue previously recorded by the Company (if any), the
timing of future revenue recognition changes to correspond with the terms of amended agreements. These
amendments or future amendments will aÅect the timing and amount of revenues recognized in connection
with these commercial agreements. To the extent the Company believes any such amendments cause or
may cause the compensation to be received under an agreement to no longer be Ñxed or determinable, the
Company limits its revenue recognition to amounts received, excluding any future amounts not deemed
Ñxed or determinable. As future amounts are subsequently received, such amounts are incorporated into
revenue recognition over the remaining term of the agreement.
Outbound shipping charges to customers are included in net sales and amounted to $365 million,
$357 million and $339 million in 2002, 2001 and 2000, respectively.
Cost of Sales
Cost of sales consists of the purchase price of consumer products sold by the Company, inbound and
outbound shipping charges, packaging supplies and certain costs associated with service revenues. Costs
associated with service revenues classiÑed as cost of services generally include direct and allocated indirect
fulÑllment-related costs to ship products on behalf of third-party sellers, costs to provide customer service,
credit card fees and other related costs.
Outbound shipping charges and the cost of tangible supplies used to package products for shipment to
customers totaled $404 million, $376 million, and $340 million in 2002, 2001 and 2000, respectively.
FulÑllment
FulÑllment costs represent those costs incurred in operating and staÇng the Company's fulÑllment
and customer service centers, including costs attributable to: receiving, inspecting and warehousing
inventories; picking, packaging and preparing customers' orders for shipment; credit card fees and bad debt
costs; and responding to inquiries from customers. FulÑllment costs also include amounts paid to third-
party co-sourcers that assist the Company in fulÑllment and customer service operations. Certain Services
56