Amazon.com 2005 Annual Report Download - page 34

Because of our model we are able to turn our inventory quickly and have a negative operating cycle2.On
average, our high inventory velocity means we generally collect from our customers before our payments to
suppliers come due. Inventory turnover3was 14, 16, and 18 for 2005, 2004, and 2003. We expect some
variability in inventory turnover over time since it is affected by several factors, including our product mix, our
mix of third-party sales, our continuing focus on in-stock inventory availability, our future investment in new
geographies and product lines, and the extent we choose to utilize outsource fulfillment providers. Accounts
payable days4were 54, 53, and 50 for 2005, 2004 and 2003. We expect some variability in accounts payable days
over time since it is affected by several factors, including the mix of product sales, the mix of third-party sales,
the mix of suppliers, seasonality, and changes in payment terms over time, including the effect of negotiating
better pricing from our suppliers in exchange for shorter payment terms.
Our spending in technology and content will increase as we add computer scientists and software engineers
to continue to improve our process efficiency, enhance the customer experience on our websites and those
websites powered by us and invest in several areas of technology including seller platforms, search, web
services, and digital initiatives. We believe that advances in technology, specifically the speed and reduced cost
of processing power, the improved consumer experience of the Internet outside of the workplace through lower-
cost broadband service to the home, and the advances of wireless connectivity, will continue to improve the
consumer experience on the Internet and increase its ubiquity in people’s lives. Our challenge will be to continue
to build and deploy innovative and efficient software that will best take advantage of continued advances in
technology.
Our financial reporting currency is the U.S. Dollar and changes in exchange rates significantly affect our
reported results and consolidated trends. For example, if the U.S. Dollar weakens year-over-year relative to
currencies in our international locations, our consolidated net sales, gross profit, and operating expenses will be
higher than if currencies had remained constant. Likewise, if the U.S. Dollar strengthens year-over-year relative
to currencies in our international locations, our consolidated net sales, gross profit, and operating expenses will
be lower than if currencies had remained constant. We believe that our increasing diversification beyond the U.S.
economy through our growing international businesses benefits our shareholders over the long term. We also
believe it is important to evaluate our operating results and growth rates before and after the effect of currency
changes.
In addition, the remeasurement of our 6.875% PEACS and intercompany balances can result in significant
gains and charges associated with the effect of movements in currency exchange rates. Currency volatilities may
continue, which may significantly impact (either positively or negatively) our reported results and consolidated
trends and comparisons.
For additional information about each line item summarized above, refer to Item 8 of Part II, “Financial
Statements—Note 1—Description of Business and Accounting Policies.”
Critical Accounting Judgments
The preparation of financial statements in conformity with generally accepted accounting principles of the
United States (“GAAP”) requires estimates and assumptions that affect the reported amounts of assets and
liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated
financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as
the ones that are most important to the portrayal of the company’s financial condition and results of operations,
and which require the company to make its most difficult and subjective judgments, often as a result of the need
2The operating cycle is number of days of sales in inventory plus number of days of sales in accounts
receivable minus accounts payable days.
3Inventory turnover is the quotient of annualized cost of sales to average inventory over five quarters.
4Accounts payable days, calculated as the quotient of accounts payable to cost of sales, multiplied by the
number of days in the period.
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