Corporate annual reports: financial communication and operational planning

Annual Report

There are several sections to the 2012 Amazon Annual Report. The first five pages after the cover page consist of a letter to the shareholders, followed by a reprint of the 1997 letter to the shareholders. The rest of the annual report consists of the 10-K. The main sections of the 10-K are the descriptive Part I (business description, risk factors, etc.), the financial Part II (financial statements, notes, and accounting disclosures) and Part III, which is the governance section. There is also Part IV, which consists of the exhibits for the report.

Amazon enjoyed strong financial performance for the year. In his letter, CEO Jeff Bezos noted that the company's customer-driven focus, automated systems and its different investments are all key contributors to growth at the company. In particular, the Kindle, Amazon Prime and digital media are elements to which the company's performance is attributed. There is no real discussion of the general business conditions, and while Amazon makes most of its money from its retailing, Bezos does not talk much about that other than the emphasize the customer focus.

While the CEO does not discuss the main business, it is that main business that has driven so much of Amazon's growth. The company gained nearly $10 billion in product sales and three more billion in service sales. This growth come on the heels of similar growth figures for 2011, indicating that Amazon's financial performance can be mainly attributed to the company's strong growth thus far. As its business grows -- a combination of it having tremendous reach in the marketplace and the online shopping industry growing organically as well -- Amazon is in a position to grow its revenues substantially.

Furthermore, the company lost money in 2012., and its net income declined in 2011 as well. These losses were not related to the cost of sales, but rather to the other expenses. It appears that Amazon held its gross margin steady in 2012, though it should be noted that its business model relies on slender margins that put the company at risk for losses. There was a significant increase in fulfillment expenses, which should not be too surprising, given that fulfillment reflects that discount offered in the form of free shipping -- a discount used to entice shoppers and thereby increase the company's revenues. There was also a significant increase in technology and content investment, since Amazon has made significant investments in research and development. The multiple new ventures that Bezos outlined in his letter probably fall into this category. He had to write about the glowingly because investment in these things was dragging down the company's financial performance. So it appears that the company's own actions are primarily responsible for the decline in financial performance at Amazon over the past couple of years, culminating in that loss in 2012.

As far as assets, Amazon does have some fixed assets, mostly office space and warehouses. It does not elaborate on where -- its Seattle headquarters is listed as being in "North America" -- and the company has two North American fulfillment centers and two more in Europe. On the balance sheet, cash the largest asset class, comprising $8.084 billion. This is followed by property and equipment, most of which is equipment such as servers, and this is valued at $7.06 billion. Inventories are worth $6.031 billion. The company has a lot of value in marketable securities, accounts receivable and goodwill as well. Goodwill represents the surplus value of firms that Amazon bought. That the company has retained this value is a good sign, because bad purchases require a goodwill write-down. The marketable securities are investments that are between three months and a year, and are very liquid. There are also securities under three months. These are considered to be highly liquid and are therefore classified as cash equivalents, as in "cash and cash equivalents."

The company outlines its controls on page 75 of this report. It notes that it "carried out an evaluation required by the 1934 Act, under the supervision and with the participation of our principal executive officer and principal financial officer on the effectiveness and design of our disclosure controls and procedures." This means that the CEO and CFO, who must sign off on the veracity of the statements, worked with the accounting department to ensure that there were strong control procedures. This itself is a control procedure. Amazon describes these procedures as being 'designed to provide reasonable assurance of achieving their objectives as specified above," meaning that the statements accurately reflect the financial condition of the company.