Amazon.com 2004 Annual Report Download - page 68

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
arrangement meet the following criteria: the delivered item has value to the customer on a standalone basis; there
is objective and reliable evidence of the fair value of undelivered items; and 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,indetermining 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 primarily obligated 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
primarily obligated 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. Under our syndicated stores
arrangements, we record gross product sales and costs since we own the inventory, set prices, and are responsible
for fulfillment and customer service, and the other business earns a sales commission.
Product sales and shipping revenues, net of promotional discounts, rebates, and return allowances, are
recorded when the products are shipped and title passes to customers. Retail sales 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,
which is commonly referred to as “F.O.B. Shipping Point.” Return allowances, which reduce product revenue,
are estimated using historical experience. Amounts paid in advance for subscription services, including amounts
received for online DVD rentals and other membership programs, are deferred and recognized as revenue on a
straight-line basis over the subscription term.
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 similar 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, excluding amounts earned from
third-party sellers where we don’t provide fulfillment services, amounted to $420 million, $372 million, and
$365 million for 2004, 2003, and 2002.
Cost of Sales
Cost of sales consists of the purchase price of consumer products sold by us, inbound and outbound
shipping charges, packaging supplies, and costs incurred in operating and staffing our fulfillment and customer
service centers on behalf of other businesses, such as Toysrus.com, Inc. and Target Corporation. 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-related costs totaled $617 million, $508 million, and $404 million for the years ended
December 31, 2004, 2003, and 2002.
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