Reference no: EM13538725

Refer to information in Note 1-Description of Business and Accounting Policies in the Notes to the Consolidated Financial Statements related to Accounts Receivable.
a. Does Amazon.com account for the possibility that some customers or vendors may not fully pay for previous purchases on credit? If so, how? If not, why not?
b. Assume that all receivables are "Accounts Receivable" (i.e., there are no "other" or "vendor" receivables). How is the amount reported on the balance sheet different from the ending balance of "Accounts Receivable" in a given year (Hint: there is a keyword that should tip you off)? Calculate the actual ending balance of "Accounts Receivable" in 2011 and 2010.
c. Suppose that in 2011, Amazon.com receives cash payments for customer purchases made on account in prior periods totaling $1,600 million. Evaluate how well the managers of Amazon.com accounted for the possibility that some customers may not fully pay for purchases made on credit. That is, did the managers of Amazon.com overestimate or underestimate how much they would actually receive from customers and vendors for previous purchases on account?

Requirement 2: Briefly answer each question with no more than 2-3 sentences each. If necessary, you may use appropriate T-accounts (e.g., Accounts Receivable) to help explain your responses.

3. Refer to information in Note 1-Description of Business and Accounting Policies and Note 3-Fixed Assets in the Notes to the Consolidated Financial Statements.
a. What method of depreciation does Amazon.com use, and why isn't "Depreciation Expense" on the income statement?
b. Note that each class of assets has a separate "Accumulated Depreciation" contra-asset account. Further assume that Depreciation Expense related to the "Technology and Infrastructure" class of assets for 2011 is $392 million. What other transaction related to this class of assets must have happened in 2011?

Requirement 3: Briefly answer questions (a) and (b) above. In addition, draw a T-account (you will need to determine which account to analyze in order to answer the above question!) to support your response to question (b), highlighting the amount of the additional transaction.

4. Refer to the summarization of the legal proceedings in Note 7-Commitments and Contingencies.
a. Why is it necessary to disclose this information in the footnotes?
b. In most cases, there are no specifications regarding how an individual lawsuit against Amazon.com may have a monetary impact in the future, but the suits are discussed at length. Therefore, what is the relative likelihood that these cases will result in a ruling that is unfavorable for Amazon.com?
c. Suppose that one lawsuit filed against Amazon.com was settled on November 13, 2011 (the first cash payment is made some time during 2012). Amazon.com was compelled to pay the claimant for infringement damages of $600 million in equal installments over the next three years. How should Amazon.com account for this outcome? How could this impact the financial position of Amazon.com?

Requirement 4: Briefly answer questions (a) and (b). Recall that there are specific criteria relating to disclosing contingent liabilities. For question (c), specify how this scenario would impact the 2011 Statement of Operations. In addition, how would this outcome change the 2011 Balance Sheet? What amounts would be added to which section the balance sheet, and how would they be classified? Finally, how would this event alter the liquidity of Amazon.com (you do not need to show calculations-just explain)?

5. Refer to the Consolidated Balance Sheet and Note 1-Description of Business and Accounting Policies as they relate to investment activities. The notes clearly specify how Amazon.com accounts for various investing activities.
a. On the Balance Sheet, which line items include Short-term investments? Which line item includes Equity-method investments?
b. Assume that "Marketable Securities" on the balance sheet contain investments that are accounted for as trading securities. The ending balance in 2010 is $4,985 million. Suppose that during 2011, Amazon.com sells off $1,000 million of these investments, and purchases additional investments at a cost of $1,218. What other transaction or adjustment should have occurred to arrive at the ending balance of $4,307 million?

Requirement 5: Answer question (a) briefly. For question (b), create a T-Account for the marketable securities. Clearly label the beginning and ending balances and the effects of Amazon.com's transactions during 2011 on this account.

6. Refer to the Consolidated Balance Sheet and Consolidated Statement of Cash Flows for 2011. Note that no shares of preferred stock have been issued.
a. Suppose that during 2011, Amazon.com's Board of Directors decided to issue preferred stock (100 million shares of $100 par, $7 preferred stock) in 2012 to raise additional capital (assume they sell at par and all shares are bought). What impact would this have on the 2012 Statement of Cash Flows?
b. Given the company's debt position, would this be a sound business decision for Amazon.com's managers?

Requirement 6: For questions in part (a), calculate the amount of the preferred stock dividend; how would this impact Cash Flows Provided (Used) by Operating, Investing, and/or Financing activities? For question (b), compute the company's liquidity using the Quick Ratio as of the end of 2011, both with and without the sale of preferred stock (assume they pay the annual dividend in February 2012). Given this ratio, would issuing the preferred stock be a good decision?