Amazon's Aggressive Income Statement

Of course, one possible explanation is that it is still amortizing unearned revenue from past years. Indeed, it may be amortizing the value of equities it received as payment from Internet companies in 1999 and 2000. If this is the case, investors must ask how much more of this equity-related revenue it has left on the balance sheet to amortize into earnings. If it is about to be exhausted, which seems likely, the contribution of unearned revenue to earnings could slump.

What is the relevant yardstick for gauging unearned revenue amortization? The most appropriate would be unearned revenue amortization as a percentage of unearned revenue already on the balance sheet, plus additions to that number in the given year. That number rose to 74% in 2002, from 42% in 2000, applying quarterly ratios.

Keeping the 2000 ratios in 2002, unearned revenue would have been $69 million lower. Applying the 25% margin to that sum gives an earnings boost of $17 million, or 9.6% of operating earnings. Curry said the unearned revenue ratio was "appropriate" and advised that Detox look at Amazon's most recent annual report, "which illustrates the ins and outs of deferred revenue period to period." The annual report didn't appear to shed light on the reason for the strange increase in this ratio.

Also odd is the fact that unearned revenue collected is dropping as a percentage of net sales. It fell to 2.4% of net sales in 2002 from 3.7% in 2001. It's hard to see a good reason for a decline of that size. The dark explanation would be that Amazon is booking revenue too quickly to boost earnings.