Research Paper Example: Analysis of Financial Statements of Amazon

This paper presents an analysis of the financial statements of Amazon. The aim of the report is to analyze the financial position of Amazon by highlighting the changes in financial ratios, cash and account balances for years 2014, 2015 and 2016 and indicating the reasons for the changes. The paper will further report the valuation method that Amazon uses in valuing its inventory and investments plus the benefits of using such method. Lastly, a prediction of the performance of the company in comparison to its competitors will be made based on industry trends and its plans.

Financial Ratios

The current ratio which is a liquidity ratio deteriorated for all three years. In 2014, the current ratio declined from 1.12 in 2014 to 1.05 in 2015 and ultimately to 1.04 in 2016 (Nasdaq, 2017). Deteriorating current ratio shows that Amazon's capability of paying its obligations is worsening. An increase in current liabilities over current assets was the primary cause of the deteriorating current ratios. The gross profit margin improved from 29% in 2014 to 33% in 2015 and ultimately to 35% in 2016. Concerning efficiency, the receivables turnover improved from 17.15 in 2014 to 17.78 2015 and 18.42 in 2016 (Nasdaq, 2017). The changes in this ratio show that Amazon is effectively processing its credit. The return on assets improved from negative 0.44% in 2014 to 0.91% in 2015 and eventually to 2.84%. The improvement was as a result increased sales

Changes in Cash Inflows and Outflows from Operating, Investing and Financing Activities

Amazon has been generating increasing cash flows from its operations. In 2015, it reported cash flows of $11,920 million from their operation which was a 74% increase from $6,842, reported in 2014 while 2016 reported $16,443 million (Amazon, 2017). The change in its cash flows from operations implies Amazon has been generating more from its operations and simultaneously spending less. The net cash flows from investing activities were negative and increased for the three years. In 2015, the company reported ($5,065) million while 2015 and 2016 the cash flows from investing rose to ($6,450) and $(9,876) million respectively. The changes in cash flows from investing activities are as a result of the long term investments in fixed assets and marketable securities. In 2015, Amazon bought marketable securities worth $4,091 million which was an increase from $2,542 spent in 2014 while in 2016 the amount spent to purchase marketable securities rose by 90% to $7,756 million (Amazon, 2017). In 2014, Amazon reported cash flows of $4,432 million from its financing activities however, the two years ended December 2015, and 2016 reported negative cash flows of ($3,763) and ($2,911) million respectively. The variances in cash flows were as a result of borrowings and lease repayments. In 2014, the company was granted a loan of $6,359 million while in 2015, and 2016 Amazon made combined repayments of $4,235 and $4,361 for its long-term debts and leases.

Account Balances

Permanent accounts are also known as real accounts. Balances for these real accounts are usually carried over to the next period (Masoom, 2013, p.403). Permanent accounts are found in the balance sheet of a company, and they comprise of the asset, owner's equity and the liability accounts (Masoom, 2013). However, the owner's drawing account is not a real account. Assets represent resources that a company owns which have a future economic benefit. The company's balance sheet indicates increasing values of the total assets from $54,505 million in 2014 to $64, 747 million in 2015 and ultimately to $83, 402 million as of December 2016 (Amazon, 2017). The changes in the asset account balances were as a result of the company's substantial investment in fixed assets of $16,937 million $21, 838 million and $29, 114 million during the three years. Liabilities represent amounts the company owes individuals or organizations. Balances for the total liabilities was $51,363 million in 2015 which was a 17% increase from $43, 764 million reported in 2014 while 2016 reported $64, 117 million. As per the annual reports, the changes in account balances for the liabilities were as a result of the increase in creditors and accrued expenses. Equity indicates the investments that shareholders have put in a firm. Amazon's balance sheet shows increasing equity account balances for the three years. In 2014, the equity balance was $10, 741 million which then increased to $13,384 million in 2015 and ultimately to $19,285 million in 2016 (Amazon, 2017). The growth of the retained earnings from the increased profits in 2015 and 2016 and the additional paid in capital had the greatest effect on the growing equity account of the company.

Valuation Methods Used for Inventories and Investments

Amazon values its inventories at the lower of cost and net realizable value (Amazon, 2017). Cost refers to the stock acquisition price which is computed using the first in first out methods. The net realizable value represents the total amount that is received from sales after taking into account any expense that a firm incurs before or during disposal. There are several benefits of utilizing this method in that it ensures adherence to the principle of prudence which guarantees recognition of all unrealized losses however not all unrealized gains. Secondly, the method ensures consistency in financial reporting.

The firm uses the equity method to value its investments in other firms (Amazon, 2017). The equity method records investments at initial costs without making adjustments for any changes in their market values. A significant advantage of applying the equity method in evaluating investments is that it shows accurate accounting thus complying with the generally accepted accounting principles. Further, the method may enhance financial ratios for the parent company since if it had reported low profits the inclusion of the figures of the investee companies might show improved profits.

Projections

From the information gathered and the annual reports for the previous years, the expectation is that the firm will continue with its profit generating trend. In 2016 the company reported a profit of $2,371 million a 328% increase from $596 million reported in 2015 while 2014 reported a loss of $241 million. The company reported revenues of $35.71 billion in the first quarter of 2017 a 22.61% increase in comparison to the same period in 2016 (Financial times, 2017). Also, the company has heavily invested in transportation such as shipping and leasing of cargo jets to enable continuous sales growth (Business Insider, 2017). Amazon has a large growth potential, and it manages its cash flows well which will allow it oversee its expansion plans thus continue to make more profits.

References

Amazon. (2017). Annual reports, proxies and shareholder letters. Retrieved from http://phx.corporate-ir.net/phoenix.zhtml?c=97664&p=irol-reportsannual

Business Insider. (2017). Amazon is growing its shipping network an absurd amount and that could be bad news for FedEx. Retrieved from http://www.businessinsider.com/amazon-growing-shipping-network-2016-8?IR=T

Financial Times. (2017). Amazon forecasts. Retrieved from https://markets.ft.com/data/equities/tearsheet/forecasts?s=AMZN:NSQ&mhq5j=e1

Masoom, K. (2013). The entrepreneur's dictionary of business and financial terms. Singapore: Trafford Publishing.

Nasdaq. (2017). Amazon company financials. Retrieved from http://www.nasdaq.com/symbol/amzn/financials?query=ratios