Amazon.com 2006 Annual Report Download - page 64

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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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, are estimated using historical experience. Amounts received
in advance for subscription services, including amounts received for online DVD rentals, Amazon Prime and
other membership programs, are deferred and recognized as revenue 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 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 $567 million, $511 million,
and $420 million for 2006, 2005, and 2004. Outbound shipping-related costs are included in “Cost of sales” and
totaled $884 million, $750 million, and $617 million for 2006, 2005, and 2004. The net cost to us of shipping
activities was $317 million, $239 million, and $197 million for 2006, 2005 and 2004.
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. 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
third-party seller transactions, are classified in “Fulfillment” on our 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
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