Case Study

Topics: Balance sheet, Generally Accepted Accounting Principles, Income statement Pages: 48 (4623 words) Published: October 29, 2013
Cash Flows at Amazon.com

Abstract: This instructional case illustrates how Amazon.com’s strategy has evolved over time and how these characteristics are reflected in the financial statements. A particular emphasis is placed on the cash flow statement. Students evaluate the cash flow statement and examine its articulation with the other financial statements. Students create a direct method cash flow statement in the year of Amazon.com’s initial public offering using the information available in the financial statements.

In the summer of 1994, Jeff Bezos sacrificed a promising career in investment banking and his personal savings to start what would become “Earth’s Biggest Bookstore,” Amazon.com. He left New York and went to Seattle and like so many successful (and unsuccessful) businesses, started out in a garage. The compelling force that drove Bezos was the 2,300% annual growth in web usage. He could see that the internet, which was in its infancy in 1994, would soon become ubiquitous. Features of the book industry made it ideal to focus on selling books, at least initially. The book industry was fragmented, both in terms of the large number of booksellers and publishers. In addition, there were millions of titles and potential customers. The typical bookstore could house a small fraction of all published books, so Amazon.com could market itself as the earth’s largest bookstore. When Bezos founded Amazon.com, he focused on hiring talented and unconventional managers and employees. Amazon.com had rigorous requirements for new employees and an obsession for customer service. Amazon.com told temp agencies “send us your freaks.” (Spector 2002, 113). The hiring of talented employees was coupled with an austere culture, exemplified by the use of desks made of doors and 2x4s. These desks were initially used because they were inexpensive and later because they matched the culture. The result was an atmosphere that could weather the growing pains and ultimately become the most recognizable internet retailer in the world. Amazon.com’s Evolving Strategy

The business model that Jeff Bezos embraced was to grow as quickly as possible. Given the rapid growth of the internet, it was more important to gain market share and brand recognition than to operate efficiently. The strategy was successful as measured by the dramatic growth in revenue from under $150 million in 1997, the year of the initial public offering (IPO), to over $34 billion in 2010 (see Exhibit 1). Although the company began selling only books, it is clear that Bezos planned on being much more than a bookseller. The 1997 annual 10-K report states that the company “intends over time to expand its catalog into other information-based products, such as music.” By the next year, Amazon.com launched online music and video sales and quickly became the number one online music and video seller. The 1998 annual 10-K report reveals the evolution of the business strategy to sell just about anything: “The Company's objective is to become the best place to buy, find and discover any product or service available online” (Amazon.com 1998, 3). Besides expanding the scope of its strategy in terms of the products sold, Amazon.com also expanded geographically. In 1998, Amazon.com acquired internet companies in the United Kingdom and Germany and launched www.amazon.co.uk and www.amazon.de respectively. These websites quickly became number one in their markets. Over time, investments and acquisitions resulted in the launch of websites in France (www.amazon.fr in 2000), Japan (www.amazon.co.jp in 2000), Canada (www.amazon.ca in 2002), China (www.amazon.cn in 2004), and Italy (www.amazon.it in 2010). In addition, an increasingly significant portion of revenue is derived from services provided to other businesses. Profitability, although a necessary long-term goal, was not expected for several years. Investors understood and initially accepted the importance of...
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