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Technology Stocks : Amazon.com, Inc. (AMZN) -- Ignore unavailable to you. Want to Upgrade?

To: getgo234 who wrote (31145)	12/25/1998 3:03:00 PM
From: Glenn D. Rudolph	Respond to of 164684

How do you handle the accounting for the sale of gift certificates in December but the certificates are not utilized to purchase merchandise until January ? I suspect this will be a very big item for AMZN in the 4th quarter. If revenue from the sale of gift certificates is recorded in the 4th quarter but the expenses (cost of goods sold) are not picked up until the 1st quarter I would think the financial results for the two quarters could be significantly distorted. (Gross profits would be very high in the 4th quarter relative to the first quarter of 99). Your comments please. Merry Christmas. getgo, We account for gift certificates as other revenue and and an equal liability amount called unclaimed order deposits. This is GAAP I believe since I have two accounting firms and both agree. The other revenue would distort gross margins since an unredeemed certificate would not have a cost of goods sold attached. The two line items are identical and the gift certificate money is pure revenue as an asset. The unclaimed deposits account is pure liability. The liability is not reduced by the average cost of goods sold so there is no margin at all. When the gift certitificate is redeemed, the revenue is decreased from other revenue and moved to sales. The unclaimed deposits is reduced by the same dollar amount but the liability only goes up in the cost of goods sold. Therefore, at that point, the gross margin shows. There are some gift certificates that are never redeemed. After three years, we move theses unredeemed certificates from other revenue and take it as other income on the bottom line since the gross margin is 100%. This way the true gross margins are not skewed to the high side. I believe this is the proper accounting method for gift certificates. I also believe Amazon will place their sold gift certificates in sales and this will skew gross margins to the upside since there are no costs of goods sold. This is not illegal as far as I know. First those that do turn a profit, prefer not to skew the number since it increases income taxes. Who wishes to pay income tax on unearned income before it is earned? Amazon has no income so there are no taxes to increase. Is my explanation clear because I am really tired today? :-) Glenn

To: getgo234 who wrote (31145)	12/25/1998 10:01:00 PM
From: Dwight E. Karlsen	Read Replies (2) \| Respond to of 164684

getgo, GAAP accounting says that you don't recognize revenue without recognizing the Cost of Goods Sold. An unredeemed gift certificate could not, IMO be included in the sales number for Q4 1998, unless they use an estimated cost for the unpicked and unshipped book. It would not even be listed as "other income" like Glenn stated, IMO. Unredeemed gift certificates would be accounted for like this: When the certificate is purchased, debit Cash (asset), credit Unearned Revenue (liability). When the certificate is redeemed, Unearned Revenue is debited, and Sales credited. Inventory is credited, and Cost of Goods sold debited. That completes the accounting. In the same manner, it is totally illegal to recognize cost of goods sold without recognizing the revenue in the same quarter. Any company that did this would be getting a call from the IRS, with heavy penalties the likely result. With AMZN wanting to tally all certificates in the sales column for this quarter, I would guess that they will use an estimated Cost of Goods Sold number. I would guess that the IRS allows this.