FINANCIAL STATEMENT CASE: The Amazon.com financial statements appear in Appendix A.

Answer the following questions about Amazons stock. The accumulated deficit account is Retained Earnings with a negative balance. REQUIREMENTS: 1. How much of Amazons preferred stock was outstanding at December 31, 2005? How can you tell? 2. Examine Amazon.coms balance sheet. Which stockholders equity account increased the most during 2005? What caused this increase? The statement of operations (income statement) helps to answer this question. 3. Use par value and the number of shares to show how to compute the balances in Amazon.coms common Stock account at the end of both 2005 and 2004. 4. Would it be meaningful to compute Amazon.coms return on equity? Explain. SOLUTIONS: 1. None of Amazons preferred stock was outstanding at December 31, 2005. We can see it from the consolidated balance sheets, under STOCKHOLDERS EQUITY: The preferred stock item was recorded: Issued and outstanding sharesNONE. 2. Stockholders equity accounts was listed as follows : December 31, 2005 Preferred stock, $0.01 par value: Authorized shares500 Issued and outstanding sharesnone Common stock, $0.01 par value: Authorized shares5,000 Issued and outstanding shares416 and 410 shares 4 4 2,213 32 --Increases from 2004 to 2005 0 140 (26) 359 2004

Additional paid-in capital. 2,263 Accumulated other comprehensive income 6

Accumulated deficit (2,027) (2,386)

The accumulated deficit account increased the most during 2005. This increase means the deficit reduced during 2005, which was caused by the net income of 2005. If we see the consolidated statements of operations of Amazon.com, We can find out this information from the consolidated statements of

operations. The net income during the year of 2005 increase on is $359 million, and that is precisely exactly the difference between increase of the accumulated deficit of the years from 2004 to 2005. In other words, the negative numbers decreased on this year . We can see the same result from the CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY, which is showed in the column of Accumulated Dificit. 3.

Common stock balance

= Number of shares issued x Par value per share 416 410 x x $0.01 $0.01 = $ 4.16 = $ 4.10

Common stock balance for 2005 = Common stock balance for 2004 = 4.

If we compute the return on equity for the year 2005, is 145.93% it would be 37.79. The return on assets on the year 2005 is 24.40%. On this way, it means that the company is really healty. In other words, the companys interest expense is smaller than its return on equity, we are earning more than we expend. Further more, normal companies have return on equity of an average value of 15%, and seeing Amazon.coms 145% one can tell that is a superlative positive number. As a conclusion, it wont be meaningful to compute Amazon.coms return on equity. But its not meaningful, because the Common Stockholders Equity (Total Stockholders Equity preferred equity) is turned from negtive into positive during 2004 and 2005. It means denominator of ROE would be underestimated and the ROE would be overestimated.