Research Papers

Merchandising Evaluation Research Paper

Amazon is an American multinational company that specializes in technology through the areas of cloud computing, artificial intelligence, e-commerce, and digital streaming. This Seattle-based company is ranked among the big four technology companies alongside Facebook, Apple, and Google. Through mass scale and technological innovation, Amazon has created a repute of disrupting industries including the e-commerce industry. Amazon is considered the largest e-commerce marketplace as measured by revenue. Notably, Amazon’s fiscal year follows the typical calendar with the last day of the year being 31st December. According to the Wall Street Journal (2019), Amazon’s total assets were valued at $162,648 million in 2018. Important to note, Amazon’s total assets have been increasing for the better part of its history. In the same year, total liabilities amounted to $119,099 million. Moreover, total equity was $43,549 million in 2018 (The Wall Street Journal, 2019). In the year ending 31st December 2018, Amazon generated a revenue of $232.887 billion.

There are three inventory methods namely first in, first out (FIFO), last in, first out (LIFO), and weighted-average cost (WAC). While the FIFO method prevents losses caused by spoilage, it may not be ideal for products that have fluctuating prices as this may lead to misstated profits. In the case of LIFO, there are tax advantages. On the other hand, LIFO is difficult to maintain as the older inventory sometimes never get sold. Lastly, while the WAC method is simple to use, the pricing may not restore the cost of expensive units if inventory prices vary widely. That said, Amazon uses FIFO inventory method. After the inventory is accounted for using the FIFO method, they are valued at the lower of cost and net realizable value (Stock Analysis on Net, 2019). To do so, Amazon has to make judgments using available information concerning the method of disposition likely to be used. Since Amazon has an extensive warehouse infrastructure around the globe and intends to ship goods to customers at the soonest time possible, the FIFO method is its best choice for inventory method.

To calculate the net purchases for Amazon in 2018, the cost of goods sold (COGS) formula will be applied.

COGS = beginning inventory + purchases – ending inventory

In 2018, the annual COGS for Amazon was reported to be $139.156 billion (Macrotrends LLC, 2019). In addition, while Amazon’s beginning inventory in January 1st 2018 was $16,047,000,000, the closing inventory as at 31st December 2018 was $17,174,000,000 (Nasdaq, 2019). Replacing these figures in the formula becomes;

$139,156,000,000 = $16,047,000,000 + purchases – $17,174,000,000.

Therefore, purchases = $139,156,000,000 + $17,174,000,000 – $16,047,000,000 = $140,283,000,000.
Amazon’s net purchases for the year 2018 amount to $140,283,000,000.

Amazon, similar to many other brands, is defined by both strengths and weaknesses. On the one hand, Amazon prides itself as a strong brand that deals with extensive product mix. Furthermore, Amazon registers the highest revenues in the e-commerce industry. Amazon surpassed Microsoft to become the most valuable public company in the world in 2019 (Feiner, 2019). These strengths underline Amazon’s success that many suppliers and buyers not only cherish, but also desire to be associated with. On the other hand, Amazon’s business model is easily imitable. In other words, Amazon is likely to face stiff competition in the coming days when more direct competitors emerge. Limited brick-and-mortar presence significantly disadvantages Amazon as customers prefer buying particular products from physical stores. It is commendable that Amazon has realized this weakness as it is currently opening Go Stores in strategic locations (Redman, 2019). To make Amazon the to go shopping destination for all customers, it is imperative that Amazon continues with its Go Stores initiative.

Companies with higher inventory turnover are rated as top performing as it means that those companies sell products very quickly. A high selling rate denotes a constant presence of demand. In the case of Amazon, the inventory turnover for the year 2018 can be calculated by dividing the COGS with average inventory.

Therefore, inventory turnover = = = 8.1

To calculate Amazon’s day’s sales, the inverse of the inventory turnover is multiplied by the number of days in a year. In the case of 2018, there were 365 days as it was not a leap year.

Therefore, day’s sales for Amazon in 2018 = (1/8.1) x 365 = 45.1

In the e-commerce industry, Alibaba is Amazon’s fiercest competitor. For comparison purposes, Alibaba’s COGS and day’s sales will be computed as follows.

Alibaba’s COGS in 2018 was $17,105,000,000 (The Wall Street Journal, 2019). Unlike Amazon that owns physical inventory, Alibaba’s business model entails connecting buyers and sellers without necessarily owning inventory (Banker, 2014). Thus, the inventory turnover formula does not apply to Alibaba. Similarly, the day’s sales formula is not applicable to Alibaba’s business model. Nevertheless, with regard to COGS, Amazon has the upper hand with $139,156,000,000 while Alibaba has $17,105,000,000.

In conclusion, the evaluated statistics gives an optimal analysis that is essential in determining whether to invest in Amazon or otherwise. The financial status of Amazon is critical in the eyes of an investor. Since a snapshot of Amazon’s latest revenue statistics and financial health is given, this paper serves the purpose of a reliable evaluation tool for investors. In addition, it has been discovered that Amazon’s inventory turnover is quite high which translates to fluent cash flows and substantial profits at the end of the year. Lastly, through the relative COGS statistics, it is evident that Amazon is the e-commerce market leader that outshines its closest competition.

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