Amazon.com 2003 Annual Report Download - page 59

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the
arrangement meet the following criteria: (1) the delivered item has value to the customer on a standalone basis;
(2) there is objective and reliable evidence of the fair value of undelivered items; and (3) delivery of any
undelivered item is probable.
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 fixed percentage, a fixed-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. Return allowances, which
reduce product revenue by our best estimate of expected product returns, are estimated using historical
experience.
We periodically provide incentive offers to our customers to encourage purchases. Such offers include
current discount offers, such as percentage discounts off current purchases, inducement offers, such as offers for
future discounts subject to a minimum current purchase, and other similar offers. Current discount offers, when
accepted by our customers, are treated as a reduction to the purchase price of the related transaction, while
inducement offers, when accepted by our customers, are treated as a reduction to purchase price based on
estimated future redemption rates. Redemption rates are estimated using our historical experience for similar
inducement offers. Current discount offers and inducement offers are presented as a net amount in “Net sales.”
Commissions and per-unit fees received from third-party sellers and amounts earned through our
Merchant.com program are recognized when the item is sold by the third-party seller and our collectibility is
reasonably assured. We record an allowance for estimated refunds on such commissions using historical
experience
Outbound shipping charges to customers are included in net sales and amounted to $372 million, $365
million, and $357 million in 2003, 2002, and 2001.
Cost of Sales
Cost of sales consists of the purchase price of consumer products sold by us, inbound and outbound
shipping charges to us, packaging supplies, and certain costs associated with our service revenues. In instances
where we incur fulfillment costs to ship products on behalf of third-party sellers or provide customer service on
their behalf, such costs are classified as “Cost of sales” rather than “Fulfillment” on the consolidated statements
of operations. All credit card fees and bad debt costs, including those associated with our guarantee for certain
third-party seller transactions, are classified in “Fulfillment” on the consolidated statements of operations.
Outbound shipping charges and the cost of tangible supplies used to package products for shipment to
customers totaled $508 million, $404 million, and $376 million in 2003, 2002, and 2001.
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