Dissecting Amazon’s (AMZN) Income Statement: Revenue Exceeds $135 Billion

Dissecting Amazon’s (AMZN) Income Statement: Revenue Exceeds $135 Billion in 2016

by Dr. John E. Ware, I

The Accounting Kid dissects Amazon’s (AMZN) income statement. The company’s income statement revealed continuous revenue growth. Amazon’s revenue increased by 20% from 2014 to 2015 and 27% from 2015 to 2016 as indicated in Table 1. The company’s cost of revenue as a percentage of revenue in 2014 was approximately 70.5% ($62,752,000 / $88,988,000), 67% ($71,651,000 / $107,006,000) in 2015, and 65% ($88,265,000 / $135,897,000) in 2016. The cost of revenue is recognized when products and/or services are sold and further accounts for direct costs linked to delivering the final product and/or service to customers.  The cost of revenue represents a 14% increase from 2014 to 2015 and 23% increase from 2015 to 2016 (Table 1).  However, Amazon’s cost of revenue as a percentage of revenue continues to decline, which indicates increased efficiency with regards to producing products and delivering services to consumers.

  Table 1

  Revenue                                                                                                                                                                                                                                                                                 Change %

Revenue	12/31/2016	12/31/2015	12/31/2014	2014 - 2015	2015 - 2016
Total Revenue	135,987,000	107,006,000	88,988,000	20%	27%
Cost of Revenue	88,265,000	71,651,000	62,752,000	14%	23%
Gross Profit	47,722,000	35,355,000	26,236,000	35%	35%

  Note: Revenue less Cost of Revenue equal Gross Profit. Change % represents year over year increase. All numbers      

  expressed in thousands (000).  

Net revenue less cost of revenue equals gross profit. Amazon’s gross profit showed a 35% increase from 2014 to 2015 and 2015 to 2016 (Table 1). Gross profit margin is computed by dividing gross profit by revenue.  The decline in cost of revenue as a percentage of revenue contributes to an increase in gross profit margin. Amazon’s income statement indicates gross profit margin of 29.5% ($26,236 / $88,988) in 2014, 33% ($35,355 / $107,006) in 2015, and 35 % ($47,722 / $135,987) in 2016.  This means that Amazon generates 35 cents in gross profit for every one dollar in sales.  

  Table 2

  Operating Income 

                                                                                                                          Change %

Operating Expenses                            12/31/2016        12/31/2015        12/31/2014     2014 – 2015    2015-2016
Selling General and Administrative	43,536,000	33,122,000        26,058,000	27%	31%
Operating Income or Loss	4,186,000	2,233,000               178,000	1154%	87%

  Note: Change % represents year over year increase. All numbers expressed in thousands (000).  

Expenses incurred from the daily operating activities of a business are known as operating expenses. Selling, general, and administrative expenses (SGA) are operating expenses not included in the cost of revenue (e.g. salaries and wages, rent, utilities, etc.).  Amazon’s operating expenses and operating income are illustrated in Table 2. SGA expenses increased by 27% from 2014 to 2015 and 31% from 2015 to 2016. Furthermore, an increase in operating expenses should be expected with expansion and revenue growth. Next, the operating expenses are deducted from the gross profit to arrive at the operating income or loss.  The company’s operating income increased 1,154% from 2014 and 87% from 2015 to 2016 (Table 2). Operating income divided by revenue equals the operating margin.  Amazon’s operating margin was less than 1% at approximately .20 % ($178,000 / $88,988,000) in 2014, 2.1% ($2,233,000 / $107,006,000) in 2015, and 3.1% ($4,186,000 / $135,987,000) in 2016. The operating margin increases indicates that the company is learning to operate more efficiently.

  Table 3

  Net Income

Income from Continuing Operations               12/31/2016    12/31/2015   12/31/2014
Total Other Income/Expenses Net	190,000	-206,000	-79,000
Earnings Before Interest and Taxes	4,376,000	2,027,000	99,000
Interest Expense	484,000	459,000	210,000
Income Before Tax	3,892,000	1,568,000	-111,000
Income Tax Expense	1,425,000	950,000	167,000
Net Income From Continuing Ops	2,371,000	596,000	-241,000
Net Income
Net Income	2,371,000	596,000	-241,000
Net Income Applicable To Common Shares	2,371,000	596,000	-241,000

  Note: All numbers expressed in thousands (000).  

Nonoperating activities are deducted from the operating income or loss to compute the net income or net loss.  Nonoperating activities include other expenses and losses as well as other revenues and gains not related to the operating activities of a business (e.g. interest expense, income tax expense, gain or loss on disposal of asset, etc.).  Amazon reported a net loss of ($241,000) in 2014 and net profit of $596,000 in 2015 and $2,371,000 in 2016 as displayed in Table 3. Amazon’s profitability is intact and continues to trend up along with revenue.  The company’s profit margin was less than 1% at approximately .56% ($596,000/ $107,006,000) in 2015 and 1.7% ($2,371,000 / $135,987,000) in 2016. This means last year Amazon generated profit of 1.7 cents from every one dollar in sales. While that (1.7% profit margin) is not a number to boast about, consider the trends related to revenue growth and profitability.

The company continues to enhance operating efficiency while growing the top line (revenue). The numbers indicate that margins are improving as revenue continuously increases. The trends suggest that Amazon will generate more than $200 billion in revenue and earn $6 billion in profit. The Accounting Kid believes Amazon’s income statement for the year ended 2018 will reflect revenue in excess of $200 billion and profit close to $6 billion.