Amazon.com 2007 Annual Report Download - page 63

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AMAZON.COM, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
Revenue
We recognize revenue from product sales or services rendered when the following four revenue recognition
criteria are met: persuasive evidence of an arrangement exists, delivery has occurred or services have been
rendered, the selling price is fixed or determinable, and collectibility is reasonably assured. Additionally, revenue
arrangements with multiple deliverables are divided into separate units of accounting if the deliverables in the
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 EITF Issue No. 99-19, Reporting Revenue Gross as a Principal Versus
Net as an Agent, in determining 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.
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.
Return allowances, which reduce product revenue, are estimated using historical experience. Revenue from
product sales and services rendered is recorded net of sales taxes. Amounts received in advance for subscription
services, including amounts received for Amazon Prime and other membership programs, are deferred and
recognized as revenue over the subscription term. For our products with multiple elements, where a standalone
value for each element cannot be established, we recognize the revenue and related cost over the estimated
economic life of the product.
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 sellers and similar amounts earned through Amazon
Enterprise Solutions are recognized when the item is sold by 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 $740 million, $567 million,
and $511 million for 2007, 2006, and 2005. Outbound shipping-related costs are included in “Cost of sales” and
totaled $1.2 billion, $884 million, and $750 million for 2007, 2006, and 2005. The net cost to us of shipping
activities was $434 million, $317 million, and $239 million for 2007, 2006 and 2005.
Cost of Sales
Cost of sales consists of the purchase price of consumer products and content sold by us, inbound and
outbound shipping charges, packaging supplies, and costs incurred in operating and staffing our fulfillment and
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