Amazon.com 2007 Annual Report Download - page 59

AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
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 marketplace sellers and Amazon
Enterprise Solutions programs. In those arrangements, as well as all other product sales by other sellers, the
marketplace seller maintains ownership of the related products.
Accounts Receivable, Net and Other Current Assets
Included in “Accounts receivable, net and other current assets” are customer and vendor receivables, as well
as prepaid expenses of $23 million and $17 million at December 31, 2007 and 2006, representing advance
payments for insurance, licenses, and other miscellaneous expenses.
Allowance for Doubtful Accounts
We estimate losses on receivables based on known troubled accounts, if any, and historical experience of
losses incurred. The allowance for doubtful accounts receivable was $64 million and $40 million at
December 31, 2007 and 2006.
Internal-use Software and Website Development
Costs incurred to develop software for internal use are required to be capitalized and amortized over the
estimated useful life of the software in accordance with Statement of Position (SOP) 98-1, Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use. Costs related to design or maintenance of
internal-use software are expensed as incurred. For the years ended 2007, 2006, and 2005, we capitalized $129
million (including $21 million of stock-based compensation), $123 million (including $16 million of stock-based
compensation), and $90 million (including $11 million of stock-based compensation) of costs associated with
internal-use software and website development. Amortization of previously capitalized amounts was $116
million, $86 million, and $50 million for 2007, 2006, and 2005.
Depreciation of Fixed Assets
Fixed assets include assets such as furniture and fixtures, heavy equipment, technology infrastructure,
internal-use software and website development. Depreciation is recorded on a straight-line basis over the
estimated useful lives of the assets (generally two years or less for assets such as internal-use software, two or
three years for our technology infrastructure, five years for furniture and fixtures, and ten years for heavy
equipment). Depreciation expense is generally classified within the corresponding operating expense categories
on our consolidated statements of operations, and certain assets are amortized as “Cost of sales.”
Leases and Asset Retirement Obligations
We account for our lease agreements pursuant to Statement of Financial Accounting Standards (SFAS)
No. 13, Accounting for Leases, which categorizes leases at their inception as either operating or capital leases
depending on certain defined criteria. On certain of our lease agreements, we may receive rent holidays and other
incentives. We recognize lease costs on a straight-line basis without regard to deferred payment terms, such as
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