Consolidations of Financial StatementsCorporate Structure Amazon.com, Inc is the largest e-commerce company in the world. Through the acquisition of competitors and through the creation of various business segments, Amazon’s diversity has grown dramatically since its initial public offering in 1997. Amazon has acquired a collection of subsidiaries for a variety of reasons including growth in market share, reduction of operating costs, minimization of income tax liability and to prevent competitors from acquiring these smaller successful companies (DePillis, 2013). Amazon’s corporate structure determines how management influences operational activities in various areas of the business. Amazon’s management has diversified its collection of subsidiaries into several different market segments. Amazon’s owns more than 50 various subsidiaries including Audible, Zappos, IMDB, AbeBooks and its most recent acquisition, Whole Foods. In addition, Amazon lists its significant subsidiaries in exhibit 21.1 of its SEC filings (EDGAR, 2017). A subsidiary is a company that is wholly-owned or controlled by a parent company. GAAP requires the use of the consolidation method of accounting when the parent company owns more than 50% of another company’s stock. The consolidation method combines the financial statements of the parent company and its subsidiaries’ into one consolidated set of financial statements. Therefore, the consolidating of financial statements essentially combines the parent company and subsidiary company into one single economic entity (Hoyle, Schaefer, Doupnik, 2015). Amazon’s mergers and acquisitions have greatly expanded its reach around the world. A variable interest entity is an entity in which the investor holds a controlling interest but does not have majority ownership of voting shares. “Amazon’s consolidated financial statements include the accounts of Amazon.com, Inc., its wholly-owned subsidiaries, and variable interest entities in which Amazon is the primary beneficiary” (Amazon.com, Inc., 2017, pg.41). A reporting entity that has a controlling interest in a VIE is a primary beneficiary. A reporting entity can have a controlling interest in the VIE if it has the authority direct activities that will have a significant economic impact on the VIE’s performance, or if the reporting entity has an obligation to absorb losses or receive benefits from a VIE that could have impact on the VIE’s economic performance (FASB, ASC 810-10-05). Amazon.com, Inc. operates its subsidiaries under three reportable segments: North America, International, and Amazon Web Services (AWS). Consolidating financial statements allows Amazon to provide an accurate presentation of the financial condition and results of its subsidiaries. Consolidation allows Amazon to view the financial performance of its many subsidiaries as though they are one single entity. Amazon subsidiaries consist of both related and unrelated businesses. This confirms Amazon’s desire to expand its market share through a variety of industries. Flow of Accounting Information Consolidation is the process of merging the financial results of a parent company and its subsidiaries into a single set of financial statements. The objectives of a consolidation are to report the financial position, the results of operations, and the cash flows for the combined entity (Hoyle et al, 2015). When consolidating financial statements, all of the subsidiary company’s assets and liabilities are reported on Amazon’s balance sheet. Revenues, expenses, gains, and losses of the subsidiary companies are combined with those of Amazon and are reported on the consolidated income statement. Generally Accepted Accounting Principles (GAAP) requires entities to eliminate intercompany transactions from their consolidated statements. Only income and expense activity from outside the combined entity is reported in the consolidated financial statements, eliminating double counting. For example, any revenue earned by Amazon that is an expense of a subsidiary will not be included in Amazon’s consolidated statements. When consolidating, Amazons investment and share of equity in its subsidiaries are eliminated. To avoid double counting of net assets and equities, the consolidation process eliminates Amazon’s investment account and the subsidiary’s equity accounts (FASB, ASC 810-10). Under the purchase method, Amazon is required to identify and measure all assets and liabilities acquired, at fair value on the date of acquisition. Amazon must then adjust balance sheet accounts for its subsidiaries to the fair market value of the accounts. A goodwill will be recognized for the change in the value of assets. Amazon’s fair value of acquired assets substantially exceeded their book value, therefore goodwill is not impaired (Amazon.com, Inc., 2017, pg.46). If a parent company does not own 100% of its subsidiary, a non-controlling interest is created. The value of a non-controlling interest is the portion of the subsidiary company that is not owned by the parent company. The amount of consolidated net income attributable to Amazon and to the noncontrolling interest must be identified on the consolidated income statement (FASB, 2010). When accounting for operating cash flows, Amazon utilizes the indirect method. All noncash items that do not represent cash flows from operations must be removed from consolidated income. Any gain on the sale of assets is eliminated as well. Adjustments must then be made to change accrual based income to a cash basis of accounting. In addition, any changes in accounts receivable, inventory, accounts payable or other operating balance sheet accounts must be calculated excluding the amounts acquired from subsidiaries (Hoyle et al, 2015).Income tax benefits     By consolidating financial statements, Amazon can considerably minimize its tax liability. If a parent company has more than 80% ownership in its subsidiary, the parent company can file a consolidated income tax return. Amazon can reduce its tax liability when filing a consolidated return because the gains and profits of one company can be offset by the losses of another company in the consolidated group (Hoyle et al, 2015). For example, any losses incurred by a subsidiary will reduce the taxable income of Amazon’s consolidated group. In addition, all intercompany transactions including dividends received from a subsidiary are not included in the consolidated income tax return, which will reduce tax liability. Intra-entity profits or losses on assets are eliminated from any tax consequences unless the intercompany assets are sold to an outside party (Summer & Corum, 2016). Amazon can reduce income tax liability by owning subsidiaries in states with lower tax rates, or where sales tax is not required. Finally, the profits of a foreign subsidiary are excluded from any U.S. tax consequences (Myers, 2002).

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