expenses consist of payrolls and related expenses for development of systems

Expenses consist of payrolls and related expenses for

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expenses consist of payrolls and related expenses for development of systems and consultants. General and administrative expenses consist of payroll and other expenses for executives, finance and administrative personnel and other corporate expenses. The last account considered in our analysis of operational costs is depreciation of goodwill and merger acquisition costs. These accounts appeared for the first time in 1998 when Amazon.com acquired three Internet companies. This acquisition process became even more important during 1999 and 2000 and is expected to continue growing thus the depreciation of goodwill. As can be appreciated in Figure-7, marketing expenses represent 42 percent of the total, followed by depreciation of goodwill (25%), technology (20%) and general and administrative (8%). Figure-7: Amazon.com Structure of Operational Costs (%) 12 0 10 20 30 40 50 60 70 80 90 100 OPERATIONAL COSTS Amortization of goodwill General and administrative Technology and content Marketing and sales Deducting from gross profit the amount of total operational expenses we can obtain the profit or loss from operations, which for the case of Amazon is a loss and increasing each year. Now the question that may come to our minds is the following. Are these losses completely “real” or is there something to deal with the accounting methods? Probably the problem is that we are measuring a new economy firm with and old fashion rule. For example, when a company builds a factory the accountants never include the total cost as an expense for the first year. Usually, this is capitalized over the expected useful life of the factory. In Dot-Com companies what we have is that all costs of building their factories are recorded as expenses for that year. Other important expenses that we have seen such R&D, advertising and marketing (almost 72% of total expenses in the case of Amazon.com) are expenses that for an old 11 In July 2000 the Emerging Issues Task Force (EITF) of the Financial Accounting Standards Board (USA) determined that all amounts billed to a customer in a sale transaction related to shipping and handling should be classified as a revenue. Amazon.com has been following this as stated in their Annual Reports. 12 This figure does not include 3 percent from stock based compensations. 8
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economy firm should be fine to account for them in the same year. But in the case of an Internet company these are expenses that will influence the future of the business in a particular way, totally different than in the old economy firms. For example, let’s consider Amazon.com expenses in marketing & technology and simulate four different scenarios. Escenario-1: assumes the original values, escenario-2 assumes three years of useful life for these expenses, escenario-3 assumes five years of useful life for these expenses. And finally escenario-4 assumption is the necessary number of years to make average profits for the years 1995-2000 zero 13 . Now the profits completely change. As we see in Figure-8 Amazon.com would have had positive
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