Amazon.com 2005 Annual Report Download - page 67

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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
Amazon Enterprise Solutions 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.
Shipping Activities
Outbound shipping charges to customers are included in “Net sales” and were $511 million, $420 million,
and $372 million for 2005, 2004, and 2003. Outbound shipping-related costs are included in “Cost of sales” and
totaled $750 million, $617 million, and $508 million for 2005, 2004, and 2003. The net cost to us of shipping
activities was $239 million, $197 million, and $136 million for 2005, 2004 and 2003.
Cost of Sales
Cost of sales consists of the purchase price of consumer products sold by us, inbound and outbound
shipping charges, packaging supplies, amortization of our DVD rental library 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. Shipping charges to receive products from our suppliers are included in our inventory, and
recognized as “Cost of sales” upon sale of products to our customers. Payment processing and related transaction
costs, including those associated with our guarantee for certain third-party seller transactions, are classified in
“Fulfillment” on the consolidated statements of operations.
Vendor Agreements
We have agreements to receive cash consideration from certain of our vendors, including rebates and
cooperative marketing reimbursements. We generally presume amounts received from our vendors are a
reduction of the prices we pay for their products and, therefore, we reflect such amounts as either a reduction of
“Cost of sales” on our consolidated statements of operations, or, if the product inventory is still on hand, as a
reduction of the carrying value of inventory. Vendor rebates are typically dependent upon reaching minimum
purchase thresholds. We evaluate the likelihood of reaching purchase thresholds using past experience and
current year forecasts. When volume rebates can be reasonably estimated, we record a portion of the rebate as we
make progress towards the purchase threshold.
When we receive direct reimbursements for costs incurred by us in advertising the vendor’s product or
service, the amount we receive is recorded as an offset to “Marketing” on our consolidated statements of
operations.
Fulfillment
Fulfillment costs represent those costs incurred in operating and staffing our fulfillment and customer
service centers, including costs attributable to buying, receiving, inspecting, and warehousing inventories;
picking, packaging, and preparing customer orders for shipment; payment processing and related transaction
costs, including costs associated with our guarantee for certain third-party seller transactions; and responding to
inquiries from customers. Fulfillment costs also include amounts paid to third-parties that assist us in fulfillment
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