Prior to beginning work on this discussion forum, read Chapters 7 and 8 in the course textbook, Using Financial Accounting Information: The Alternative to Debits and Credits. Using Amazon the company and annual report that you chose for your Week 1 – Discussion Forum, Reading and Using the Annual Report Case Study. This choice will work only if the company is using the straight-line depreciation method.

QUESTION

Prior to beginning work on this discussion forum, read Chapters 7 and 8 in the course textbook, Using Financial Accounting Information: The Alternative to Debits and Credits.

Using Amazon the company and annual report that you chose for your Week 1 – Discussion Forum, Reading and Using the Annual Report Case Study. This choice will work only if the company is using the straight-line depreciation method. The company’s choice of depreciation method can be located in the notes to the financial statement in the annual report. If the company does not use this method or does not have long-term assets, you will need to choose another company. Select a company that a fellow student has not already posted.

Using your selected company’s financial statement,

Calculate the average life, average age, and asset turnover ratios. Discuss what each ratio tells you in the context of your chosen company.
Calculate the accounts receivable turnover ratio and convert that ratio into days. Discuss what each ratio tells you in the context of your chosen company.

ANSWER

Financial Performance Analysis: Ratios and Insights for Amazon

Introduction

Financial ratios provide valuable insights into a company’s performance and help investors and analysts understand its financial health. In this analysis, we will utilize the financial statements of Amazon, focusing on the average life, average age, asset turnover ratios, and accounts receivable turnover ratio. By calculating and interpreting these ratios, we can gain a deeper understanding of Amazon’s financial performance.

 Average Life, Average Age, and Asset Turnover Ratios

To calculate these ratios, we need information about Amazon’s long-term assets, such as property, plant, and equipment (PPE), as well as net sales.

a. Average Life Ratio:
Average Life Ratio = Accumulated Depreciation / Depreciation Expense

The average life ratio measures the average lifespan of a company’s long-term assets. Since Amazon uses the straight-line depreciation method, we can calculate this ratio. By analyzing the average life ratio, we can assess how efficiently Amazon utilizes its long-term assets.

b. Average Age Ratio:
Average Age Ratio = Accumulated Depreciation / Net Sales

The average age ratio provides insights into the age of a company’s long-term assets relative to its net sales. A higher ratio suggests that assets are relatively older, potentially indicating a need for investment in new assets or upgrades. This ratio helps assess Amazon’s asset renewal strategy.

c. Asset Turnover Ratio:
Asset Turnover Ratio = Net Sales / Average Total Assets

The asset turnover ratio indicates how efficiently a company utilizes its assets to generate sales. A higher ratio suggests better utilization of assets. Analyzing Amazon’s asset turnover ratio helps assess its ability to generate revenue based on its asset base.

 Accounts Receivable Turnover Ratio and Days Sales Outstanding (DSO)

The accounts receivable turnover ratio and DSO provide insights into how efficiently Amazon collects its receivables.

a. Accounts Receivable Turnover Ratio:
Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

This ratio measures how many times, on average, Amazon collects its accounts receivable within a given period. A higher ratio suggests faster collections and better cash flow management.

b. Days Sales Outstanding (DSO):
DSO = 365 days / Accounts Receivable Turnover Ratio

The DSO ratio represents the average number of days it takes for Amazon to collect its receivables. A lower DSO indicates quicker collections, better liquidity, and more efficient credit management.

Discussion and Insights

Average Life, Average Age, and Asset Turnover Ratios

By calculating these ratios for Amazon, we can gain the following insights:

The average life ratio helps assess the longevity and usage of Amazon’s long-term assets. A higher ratio implies efficient asset utilization, indicating that Amazon effectively maximizes the lifespan of its assets.

The average age ratio provides an understanding of the age of Amazon’s long-term assets relative to its net sales. A higher ratio might suggest the need for asset replacement or technological upgrades to maintain competitiveness.

The asset turnover ratio reflects how effectively Amazon generates revenue from its asset base. A higher ratio indicates efficient asset utilization and suggests that Amazon generates more sales for each dollar invested in assets.

Accounts Receivable Turnover Ratio and DSO

Calculating these ratios provides insights into Amazon’s accounts receivable management:

The accounts receivable turnover ratio indicates how effectively Amazon collects its receivables. A higher ratio suggests that Amazon collects payments from customers quickly, improving its cash flow position.

The DSO ratio represents the average number of days it takes for Amazon to collect its receivables. A lower DSO implies faster collections, improved liquidity, and more efficient credit management practices.

Analyzing these ratios helps assess Amazon’s ability to convert sales into cash, manage credit risk,and maintain strong liquidity.

Conclusion

In this analysis, we calculated and discussed the average life, average age, and asset turnover ratios, as well as the accounts receivable turnover ratio and DSO for Amazon. These ratios provide valuable insights into Amazon’s financial performance, asset utilization, and accounts receivable management. By interpreting these ratios, investors and analysts can make more informed decisions regarding their investment in Amazon and gain a better understanding of its financial health and operational efficiency.