Amazon.com 2004 Annual Report Download - page 64

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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
will be expensed over the remaining service period. Amortization of these amounts is classified in “Stock-based
compensation” on the consolidated statements of operations.
Cash and Cash Equivalents
We classify all highly liquid instruments with a remaining maturity of three months or less at the time of
purchase as cash equivalents.
Allowance for Doubtful Accounts
We estimate losses on receivables based on known troubled accounts, if any, and historical experience of
losses incurred.
Accounting Change
Effective January 1, 2002, we prospectively changed our inventory costing method from the specific
identification method to the first-in-first-out (“FIFO”) method of accounting. This change resulted in a
cumulative increase in inventory of $0.8 million, with a corresponding amount recorded to “Cumulative effect of
change in accounting principle” on the consolidated statements of operations. We received a letter of
preferability for this change in inventory costing from our independent auditors.
Inventories
Inventories, consisting of products available for sale, are accounted for using the FIFO method, and are
valued at the lower of cost or market value. This valuation requires us to make judgments, based on currently-
available information, about the likely method of disposition, such as through sales to individual customers,
returns to product vendors, or liquidations, and expected recoverable values of each disposition category. Based
on this evaluation, we adjust the carrying amount of our inventories to lower of cost or market value.
We provide fulfillment-related services in connection with certain of our Merchants@ and Merchant.com
programs. In those arrangements, as well as all other product sales by third parties, the third party maintains
ownership of the related products.
Accounts Receivable, Net and Other Current Assets
Included in “Accounts receivable, net and other current assets” are prepaid expenses of $12 million and
$6 million at December 31, 2004 and 2003, representing advance payments for insurance, licenses, and other
miscellaneous expenses.
Asset Retirement Obligations
In accordance with SFAS No. 143, Accounting for Asset Retirement Obligations, we establish assets and
liabilities for the present value of estimated future costs to return certain of our leased facilities to their original
condition. Such assets are depreciated over the lease period into operating expense, and the recorded liabilities
are accreted to the future value of the estimated restoration costs. Such amounts are not significant.
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