Question

Reviewing the vertical analyses of Target’s and Amazon’s income statements, what comparisons and conclusions can you draw from the providing data? Your answer must be a minimum of one paragraph.

Short Answer.

Answer 1

The income statement is the first place for an analyst to look at if they want to assess a company’s profitability. The income statement provides a look at a company’s financial performance throughout a certain period, usually a fiscal quarter or year. This period is usually denoted at the top of the statement, as can be seen above. The income statement contains information regarding sales, costs of sales, operating expenses, and other expenses. The following are explanations for the line items listed in Amazon’s income statement:-

Net product sales: revenue derived from Amazon’s product sales such as Amazon’s first-party retail sales and proprietary products (e.g., Amazon Echo)

Net services sales: revenue generated from the sale of Amazon’s services. This includes proceeds from Amazon Web Services (AWS), subscription services, etc.

Fulfillment: expenses relating to Amazon’s fulfillment process. Amazon’s fulfillment process includes storing, picking, packing, shipping, and handling customer service for products.

Marketing: expenses pertaining to advertising and marketing for Amazon and its products and services. Marketing expense is often grouped with selling, general, and administrative expenses (SG&A) but Amazon has chosen to break it out as its own line item.

Interest income: income generated by Amazon from investing excess cash. Amazon typically invests excess cash in investment-grade, short to intermediate-term fixed income securities, and AAA-rated money market funds.

Interest expense: expenses relating to accumulated interest from capital and finance lease obligations and long-term debt.

Other income (expense), net: income or expenses relating to foreign currency and equity warrant valuations.

Income before income taxes: Amazon’s income after operating and interest expenses have been deducted.

Provision for income taxes: the expense relating to the amount of income tax Amazon must pay within the fiscal year.

Equity-method investment activity, net of tax: proportionate losses or earnings from companies where Amazon owns a minority stake.