Finance and Accounting - Amazon Company, Ebay - Assignment Example

Finance and accounting Question one Amazon.com Amazon Company started in July 1994 and was introduced to the world by June 1995 by chief executive officer Jeff Bezos (Amazon, 2014). The chief executive officer was a fund manager by then in New York. He left the west after discovery of the use of internet was growing to as high as 2300 percent a month. As a fund manager, he formulated a plan to get his own online retail businesses, thereafter heading to Seattle to start his vision. At start, he began with only three employees working in a garage. Jeff was in a position to get Kleiner Perkins Caulfield and the Byers to finance Amazon. The products that Amazon produces include variety from videos, video games to CD’s and books. The Amazon product line includes suppliers for pets, groceries, and greeting cards. The Amazon is also associated with sites like Excite, Netscape, and Yahoo. Nevertheless, Amazon.com has links that can be used for the purchase of prescriptions and groceries. The leadership of Bezos is apparently confirmed by looking his comfortableness when addressing people like employees, investors and customers around on a regular basis. Besides these, Bezos provides the customers with quality products, provision of ample services and faster delivery of goods and services to the potential customers hence able to enhance customer loyalty. Additionally, he has the best knowledge of understanding of the e-commerce and branding the Amazon name to attract more investors. Furthermore, he has a great concern about the expenses and accountability of each single cent I the company. eBay.com EBay was started in September 1995 by Pierre Omidyar San Jose (EBay Company, 2008). It was at first intended to be a market for selling goods and services to customers. The wife to Pierre Omidyar demanded a good way to search for and the trade breakables hence making a decision to put his acquired computer skills into use. The company started by selling products and services like collectibles and antiques. Collectibles include antiques, coins, memorabilia, art, toys, and dolls. Motor vehicles included boats and cars. The electronics included computers, cameras, and cell phones. Under the category of entertainment, eBay sold DVDs’, event tickets, CDs’, clothing and books. By the year 1998, Pierre together with his founder who is Jeff Skoll brought Whiteman Meg to make it a success. Meg was a scholar of Harvard Business and had acquired skills such as branding the company name like Hasbro. Pierre gained experience after working with a number of businesses that mainly produced computer programs specifically for creating innovative data designs alongside Claris courtesy of Apple’s products. However, Pierre advocated the change of the name of the company to Echo Bay. Nevertheless, another company had registered in the name echobay.com. Consequently, this led them choose of eBay. Pierre had an attitude about unfairness that had set in most of the market arrangements hence devoted a lot of his interest to auctions. Under his Excellency Pierre, the firm was launched as eBay.com in 1995 on a labor day. After the start of the enterprise, Pierre formulated some Web designs and other pages for himself to mainly market the firm. Additionally, he came up with a strategy of publicizing in the discussion group to get the views of different stakeholders. Thereafter, the service providers of the internet started to charge him an enterprise rate of 250 pounds, and then he too began charging the customers so that he does not incur a loss. Question two From finance understanding, these are ratios that evaluate the company’s earnings respect to the sales level, the owner’s investment, an individual level of assets and the share value. These ratios are of vital importance to the potential and willing investors as they mainly measure how the management sufficiently and efficiently manages both assets and owner’s investments e to generate profits (Baldoni, & Chockler, 2012). The profitability ratios that are commonly used by the investors are the gross profit margin, the net profit margin, the return to equity ratio and the return on investment. Profitability ratios for eBay Gross profit margin: the accounting tool measures how good a company is controlling its cost of manufacturing and setting their prices of products. Gross profit= (sales-cost of goods sold)/ (sales) The analysis shall be from the annual income statements from the year 2011 to 2013. The gross profit for 2011 was $(11652000- 3461000)/11652000 = 70%. The gross profit for 2012 was $(14072000- 4216000)/14072000*100 = 70%. Finally the gross profit for 2013 was (16047000 – 5036000)/16047000*100 = 69%. Net profit margin is the second profitability ratio that investors are concerned with the company. The firm’s profit margin shows the companies after tax profit per single dollar of sales. It is computed as net profit= (net income after taxes)/sales. From the data provided, the net profit for eBay in 2013 was 2856000/16047000 = 0.18. The net profit for 2012 was 2609000/14072000 = 19%. For the year 2012, the net profit was 2609000/14072000 = 19%. The net profit for 2011 was 3229000/11652000 = 28% Thirdly, the investors are concerned with the return on total assets which measure how well a firm or rather a company uses its assets to generate profits. It is computed as Return on total assets= (net income after taxes)/(total assets) . The ROA for 2013 was 2856000/41488000 = 6.9% the return on assets for the year 2012 was 2609000/37074000*100 = 7% the return on assets for the year 2011 was $3229000/27320000 = 11.8%. Profitability ratios for Amazon The gross profit for amazon.com was computed as Gross profit= (sales cost of goods sold)/ (sales). The gross profit for the year 2013 was (74452000-54181000)/74452000*100 = 27%, the gross profit for the year 2012 was (61093000-45971000)/61093000*100 = 25% and the gross profit for 2011 was (48077000-37288000)/48077000*100 = 22% The net profit was computed net profit= (net income after taxes)/sales The net profit for 2013 was 274000/74452000*100 = 0.37%, the net loss for 2012 was 39000/61093000 = 0.00064, the net profit for 2011 was 631000/48077000*100 = 1.3%. The third profitability ratio is the return on assets. It was computed as return on total assets= (net income after taxes)/ (total assets). For the year 2013 the return on assets was 274000/24625000*100 = 1.1% return on assets for 2012 was 39000/21296000*100 = 0.18% and return on assets for 2011 was 631000/17490000*100 = 3.6% Report on the findings The gross profit of Amazon firm has improved from the year 2012 to 2013, the net profit scaled up from 2012 which was 0.064% to 0.37% in 2013. The return on assets improved from 0.18% in 2012 to 1.1% in 2013. The management is encouraged to remain focus by continuing to increase the revenue and total assets. On the other hand, eBay had a deterioration of the gross profit from 70% in 2012 to 69% in 2013. The net profit remained constant from the year 2012 to 2013 19%. This shows that there were no efforts to enhance the net profit from the enterprise. Additionally, the return on assets reduced by 7% in 2012 to 6.9%. It can clearly be understood that the eBay performance declined all through. The management is advised to change its business model to a suitable one in order to realize an increase in the sales. The net profit shall be increased by downscaling the cost of revenue and finally the return on assets shall be enhanced by investing more in both short-term and long-term assets. Question three The summary of Amazon’s mergers and acquisitions Amazon acquired Kiva systems in 2012 for $775 million. The system was well known for automated material handling system fulfillment. Amazon put the acquired resource into use for management and online retail business warehouses across the internet. Kiva’s stockholders agreed on the merger of which acquisition event took place in the second quarter of 2012. The two events that is mergers and acquisition had an impact on the financial statements such that they led to increasing in the number of shareholders and increase in the total revenue generation. It should be noted that mergers and acquisition resulted in cost efficiency hence enabling the company to enhance production hat low cost due to economies of scale hence increase in the revenue generation. Summary of mergers and acquisition for eBay eBay under Lorraine McDonough acquired Skype for about $1.9 billion. This was a strategy to increase the company operations and enhance the e-commerce. Another merge took place thereafter with Magento open source with an objective of enjoying the economies of scale. The two events impacted positively to the company financial statement such that it led to increasing in the total assets, increased the shares of the enterprise and finally to equity enhancement. The mergers and acquisitions resulted in a rise in the market share hence attracting investors as they knew that the shares of these firms will be priced high than others leading to the generation of returns. The events resulted in increasing for investors as the companies came into a position of generating profits that are the primary objective of them. Question four Analysis of Amazon income statements the past two years Based on the data from the statement of operations, one can see an increase in performance. The first item that stands out is an increase in overall revenue. At the end of the 2013, total revenue was $74,452,000,000 this is an increase of about 21.87% from 2012. The increase in this revenue was due to the respective rise in the total sales. The firm reported an increase in the sales, general and administrative expenses. The company reported an aggregate expense of $19,526,000,000 which is a scale up of 35.17% that is significant. The increasing total revenue led to an important increase in the net income from the previous year. The net income generated in 2013 was $274,000,000 while it earned a net loss of 39,000,000 in the year 2012. The analysis of eBay statement of operations for the past two years The historical statement of operations data reveals that the eBay reported an increase in overall performance. The total revenue reported by the 2013 year end was $16,047,000,000 which is an increase of 14.03% from the year 2012. It can be clearly be seen that this scale up in the total revenue was because of the hike in the production of the sales by the company. The recorded total expense for sales, general and administration at the 2013 year end was $5,554,000,000. This is an increase of about 9.76% from the previous year. However, the total net profit reported increased from $2,609,000,000 in the year 2012 to $2,856,000,000 in the year 2013. From the above analysis of the two firms, it can clearly be seen that the firms experienced an increase in profitability in recent years. Nevertheless, making a cross-sectional analysis of the two companies, Amazon Company outperformed than eBay. Although there is a difference in the sizes of the two companies, Amazon’s revenue increased by 21.87% as compared to eBay 14.03%. The eBay company can scale up its net income by increasing its sales and reduce the cost of revenue. The increase in the total sales calls for innovation and expansion of the business while reduction of cost of income needs improvement of technology where it is necessary. Question five Amazon vertical analysis Liquidity ratio is one of the vertical analysis ratios that are used to assess the firm’s ability to pay its debts when they fall due. It is computed as current ratio= (current assets)/ (current liabilities). The current ratio for 2013 was reported as 93% from 2012 was 89%. This indicates that the numbers of times the debts can be paid out by the assets before they exhaust have increased. The debt equity ratio measures the proportion of funds supplied by non-owners to the owner’s contribution to the company (Bull, 2008). The debt to equity ratio shows 32% for 2013 from 38% in 2012. This ascertains that there is an increase in the debt to enhance owner’s equity. From the balance sheet, the debt to assets ratio shows 7.95% from 9.47%. This indicates that Amazon does not rely more on debt for financing its activities and, therefore, it is not in a high financial risk. eBay vertical analysis The liquidity ratio shows 0.54 in 2013 from 0.51 in 2012. This shows that the firm’s ability to pay its obligation when they fall due has improved significantly (Tamari, 2010). The debt to equity ratios is 0.17 for 2013 from 0.20 meaning that the company is not fully utilizing its source of finance. The debt to asset ratio for the company was 9.92% from 0.11% in 2012. This indicates that the reliance of the debt by the firm has substantially increased. From the above vertical analysis of the two enterprises, eBay seems to be performing poorly. A debt evidences this to asset ratio of 9.92% as compared to debt to asset ratio of Amazon, which is 7.95%. The company should, therefore, make lots of investments that will enable it to have adequate funds to finance internal activities and other projects hence reducing exposure to financial risks. This will consequently attract investors as all investors are risk averse and will want to minimize the risks and maximize the returns. References Amazon. (2014, December 13). Timeline History Amazon.com. Retrieved from http://amazongenius.com/timeline-history-amazon-com/ Baldoni, R., & Chockler, G. (2012). Collaborative financial infrastructure protection: Tools, abstractions, and middleware. Heidelberg: Springer. Bull, R. (2008). Financial ratios: How to use financial ratios to maximise value and success for your business. Oxford: CIMA. EBay company. (2008, December 20). History of Ebay | eBay. Retrieved from http://www.ebay.co.uk/gds/History-of-Ebay-/10000000008868464/g.html Robinson, T. R. (2009). International financial statement analysis. Hoboken, NJ: John Wiley & Sons. Tamari, M. (2010). Financial ratios: Analysis and prediction. London: P. Elek. Read More