Question

Vertical analysis Amazon.com, Inc. is the largest Internet retailer in the United States. Amazon's income statements through income from operations for two recent years are as follows (in millions): Amazon.com, Inc. Operating Income Statements For the Years Ended December 31 (in millions) Year 2 Year 1 Product sales $70,080 18,908 $60,903 13,549 Service sales Total sales $88,988 $74,452 Cost of sales $62,752 $54,181 Fulfillment 8,585 Marketing Technology and content 10,766 4,332 9,275 1,552 133 $88,810 3,133 6,565 1,129 General and administrative 114 Other operating expense (income), net Total operating expenses Income from operations $73,707 $178 $745

Answer 1

Vertical analysis formula = individual item / total sales *100

Amazon.com, Inc.
Operating income statement
For the years ended December 31
	Year 2	Year 1
	amount ($)	percent (%)	amount ($)	percent (%)
product sales	70080	78.75%	60903	81.80%
service sales	18908	21.25%	13549	18.20%
total sales	88988	100.00%	74452	100.00%
cost of sales	62752	70.52%	54181	72.77%
fulfillment	10766	12.10%	8585	11.53%
marketing	4332	4.87%	3133	4.21%
technoloy and content	9275	10.42%	6565	8.82%
general and adminstrative	1552	1.74%	1129	1.52%
other operating expenses (income), net	133	0.15%	114	0.15%
total operating expenses	88810	99.80%	73707	99.00%
income from operations	178	0.20%	745	1.00%

The vertical analysis indicates that the income from operatin decreased between the two years. Total expenses increased as a percent to total sales. This increase is explained by the increase in fulfillment, marketing, technology and content, and general and administrative expenses. There was a sizable decrease in the cost of sales. However, this decrease was not sufficient to offset the increase in the other expenses; thus total expenses increased and income from operation decreased as a percent of total sales between the two years. Management should investigate the reasons for the expense increase paying special attention to technology and content.