Estimating cost functions is a process that is essential for finance professionals. Therefore, it is important that you understand the methods and best practices for conducting this process. For this Assignment, you use your assessment of cost function estimation methods in the context of the Netflix and Amazon Data Spreadsheet in this week’s Learning Resources. Then, you use this assessment, along with the ideas generated in this week’s Discussion, to develop cost function estimates for both Netflix, Inc., and Amazon.com, Inc. Use the following methods:

Netflix Inc.				2012	2013	2014
Revenues
	Cost of revenues*			$             3,609,282	$                  4,374,562	$                  5,504,656
	Marketing*			2,652,058	3,117,203	3,752,760
	Technology and development			439,208	469,942	607,186
	General and administrative			329,008	378,769	472,321
Operating income (loss)				139,016	180,301	269,741
Other income (expense):				49,992	228,347	402,648
	Interest expense
	Interest and other income (expense)			(19,986)	(29,142)	(50,219)
	Loss on extinguishment of debt			474	(3,002)	(3,060)
Income (loss) before income taxes				-	(25,129)	-
Provision (benefit) for income taxes				30,480	171,074	349,369
Net income (loss)				13,328	58,671	82,570
Earnings per share:				$                   17,152	$                     112,403	$                     266,799
	Basic
	Diluted			$                          .31	$                            1.93	$                            4.44
Weighted-average common shares outstanding:				$                          .29	$                            1.85	$                            4.32
	Basic
	Diluted			55,521	58,198	60,078
				58,904	60,761	61,699

Netflix Inc.				2012	2013	2014
Assets
Current assets:
	Cash and cash equivalents			$                     290,291	$                     604,965	$                 1,113,608
	Short-term investments			457,787	595,440	494,888
	Current content library, net			1,368,162	1,706,421	2,125,702
	Other current assets			124,551	151,937	206,271
		Total current assets		2,240,791	3,058,763	3,940,469
Non-current content library, net				1,506,008	2,091,071	2,773,326
Property and equipment, net				131,681	133,605	149,875
Other non-current assets				89,410	129,124	192,981
		Total assets		$                  3,967,890	$                 5,412,563	$                 7,056,651
Liabilities and Stockholders' Equity
Current liabilities:
	Current content liabilities			$                  1,366,847	$                 1,775,983	$                 2,117,241
	Accounts payable			86,468	108,435	201,581
	Accrued expenses			53,139	54,018	69,746
	Deferred revenue			169,472	215,767	274,586
		Total current liabilities		1,675,926	2,154,203	2,663,154
Non-current content liabilities				1,076,622	1,345,590	1,575,832
Long-term debt				200,000	500,000	900,000
Long-term debt due to related party				200,000	-	-
Other non-current liabilities				70,669	79,209	59,957
		Total liabilities		3,223,217	4,079,002	5,198,943
Stockholders' equity:
				56	60	60
				301,616	777,441	1,042,810
				2,919	3,575	(4,446)
				440,082	552,485	819,284
		Total stockholders' equity		744,673	1,333,561	1,857,708
		Total liabilities and stockholders' equity		$                  3,967,890	$                 5,412,563	$                 7,056,651

Netflix Inc.							2012	2013	2014
Cash flows from operating activities:
	Net income (loss)						$                        17,152	$                     112,403	$                    266,799
	Adjustments to reconcile net income (loss) to net cash
		provided by (used in) operating activities:
			Additions to streaming content library				(2,515,506)	(3,049,758)	(3,773,459)
			Change in streaming content liabilities				762,089	673,785	593,125
			Amortization of streaming content library				1,591,218	2,121,981	2,656,279
			Amortization of DVD content library				65,396	71,325	71,491
			Depreciation and amortization of property, equipment and intangibles				45,469	48,374	54,028
			Stock-based compensation expense				73,948	73,100	115,239
			Excess tax benefits from stock-based compensation				(4,543)	(81,663)	(89,341)
			Other non-cash items				(8,392)	5,332	15,282
			Loss on extinguishment of debt				-	25,129	-
			Deferred taxes				(30,071)	(22,044)	(30,063)
			Changes in operating assets and liabilities:
				Other current assets			(5,432)	62,234	(8,758)
				Accounts payable			(4,943)	18,374	83,812
				Accrued expenses			9,806	1,941	55,636
				Deferred revenue			20,676	46,295	58,819
				Other non-current assets and liabilities			4,719	(8,977)	(52,406)
						Net cash provided by (used in) operating activities	21,586	97,831	16,483
Cash flows from investing activities:
	Acquisition of DVD content library						(48,275)	(65,927)	(74,790)
	Purchases of property and equipment						(40,278)	(54,143)	(69,726)
	Other assets						8,816	5,939	1,334
	Purchases of short-term investments						(477,321)	(550,264)	(426,934)
	Proceeds from sale of short-term investments						282,953	347,502	385,300
	Proceeds from maturities of short-term investments						29,365	60,925	141,950
						Net cash provided by (used in) investing activities	(244,740)	(255,968)	(42,866)
Cash flows from financing activities:
	Proceeds from issuance of common stock						4,124	124,557	60,544
	Proceeds from issuance of debt						-	500,000	400,000
	Issuance costs						(759)	(9,414)	(7,080)
	Redemption of debt						-	(219,362)	-
	Excess tax benefits from stock-based compensation						4,543	81,663	89,341
	Principal payments of lease financing obligations						(2,319)	(1,180)	(1,093)
						Net cash provided by (used in) financing activities	5,589	476,264	541,712
Effect of exchange rate changes on cash and cash equivalents							(197)	(3,453)	(6,686)
Net increase (decrease) in cash and cash equivalents							(217,762)	314,674	508,643
Cash and cash equivalents, beginning of period							508,053	290,291	604,965
Cash and cash equivalents, end of period							$                     290,291	$                     604,965	$                 1,113,608
Non-GAAP free cash flow reconciliation:
	Net cash provided by (used in) operating activities						$                        21,586	$                       97,831	$                       16,483
	Acquisition of DVD content library						(48,275)	(65,927)	(74,790)
	Purchases of property and equipment						(40,278)	(54,143)	(69,726)
	Other assets						8,816	5,939	1,334
	Non-GAAP free cash flow						$                      (58,151)	$                     (16,300)	$                   (126,699)

Amazon.com Inc.				2012	2013	2014
Sales/Revenues				$61.09B	$74.45B	$88.99B
Cost of Goods Sold (COGS) incl. D&A				46.8B	54.63B	63.88B
	COGS excluding D&A			44.65B	51.38B	59.14B
	Depreciation & Amortization Expense			2.16B	3.25B	4.75B
		Depreciation		1.65B	2.46B	3.62B
		Amortization of Intangibles		506M	793M	1.13B
Gross Income				14.29B	19.82B	25.11B
SG&A Expense				13.96B	18.96B	25.37B
	Research & Development			4.24B	6.11B	8.72B
	Other SG&A			9.72B	12.85B	16.65B
Other Operating Expense				(506M)	0	0
Unusual Expense				-	0	0
EBIT after Unusual Expense				-	0	0
Non Operating Income/Expense				(239M)	(250M)	320M
Non-Operating Interest Income				40M	38M	39M
Equity in Affiliates (Pretax)				-	-	-
Interest Expense				92M	141M	210M
	Gross Interest Expense			92M	141M	210M
	Interest Capitalized			-	-	-
Pretax Income				544M	506M	(111M)
Income Tax				428M	161M	167M
	Income Tax - Current Domestic			562M	144M	279M
	Income Tax - Current Foreign			131M	173M	204M
	Income Tax - Deferred Domestic			(156M)	(133M)	(136M)
	Income Tax - Deferred Foreign			(109M)	(23M)	(180M)
	Income Tax Credits			-	-	-
Equity in Affiliates				(155M)	(71M)	37M
Other After Tax Income (Expense)				0	0	0
Consolidated Net Income				(39M)	274M	(241M)
Minority Interest Expense				0	0	0
Net Income				(39M)	274M	(241M)
	Extraordinaries & Discontinued Operations			0	0	0
		Extra Items & Gain/Loss Sale Of Assets		0	0	0
			Cumulative Effect - Accounting Chg	0	0	0
		Discontinued Operations		0	0	0
Net Income After Extraordinaries				(39M)	274M	(241M)
Preferred Dividends				0	0	0
Net Income Available to Common				(39M)	274M	(241M)
EPS (Basic)				-0.09	0.6	-0.52
Basic Shares Outstanding				453M	457M	462M
EPS (Diluted)				-0.09	0.59	-0.52
Diluted Shares Outstanding				453M	465M	462M
EBITDA				2.99B	4.11B	4.49B

Amazon.com Inc.
Assets			2012	2013	2014
Cash & Short Term Investments			$11.45B	$12.45B	$17.42B
	Cash Only		8.08B	8.66B	14.56B
	Short-Term Investments		3.36B	3.79B	2.86B
Total Accounts Receivable			3.36B	4.77B	5.61B
	Accounts Receivables, Net		2.6B	3B	3.3B
		Accounts Receivables, Gross	2.72B	3.15B	3.49B
		Bad Debt/Doubtful Accounts	(116M)	(153M)	(190M)
	Other Receivables		764M	1.77B	2.31B
Inventories			6.03B	7.41B	8.3B
	Finished Goods		0	0	0
	Work in Progress		0	0	0
	Raw Materials		0	0	0
	Progress Payments & Other		6.03B	7.41B	8.3B
Other Current Assets			453M	-	0
	Miscellaneous Current Assets		453M	-	-
Total Current Assets			21.3B	24.63B	31.33B
			2012	2013	2014
Net Property, Plant & Equipment			7.06B	10.95B	16.97B
	Property, Plant & Equipment - Gross		9.58B	14.81B	22.73B
		Buildings	2.97B	4.58B	7.15B
		Land & Improvements	-	-	-
		Computer Software and Equipment	866M	1.1B	1.3B
		Other Property, Plant & Equipment	174M	231M	304M
	Accumulated Depreciation		2.52B	3.86B	5.76B
Total Investments and Advances			151M	520M	886M
	Other Long-Term Investments		99M	482M	811M
Long-Term Note Receivable			0	0	0
Intangible Assets			3.28B	3.3B	4.08B
	Net Goodwill		2.55B	2.66B	3.32B
	Net Other Intangibles		725M	645M	764M
Other Assets			648M	538M	971M
	Tangible Other Assets		648M	538M	971M
Total Assets			32.56B	41.4B	56.34B
Liabilities & Shareholders' Equity
			2012	2013	2014
ST Debt & Current Portion LT Debt			1.14B	1.74B	3.6B
	Short Term Debt		0	0	0
	Current Portion of Long Term Debt		1.14B	1.74B	3.6B
Accounts Payable			13.32B	15.13B	16.46B
Income Tax Payable			-	-	-
Other Current Liabilities			4.55B	6.11B	8.03B
	Dividends Payable		-	-	-
	Accrued Payroll		-	-	-
	Miscellaneous Current Liabilities		4.55B	6.11B	8.03B
Total Current Liabilities			19B	22.98B	28.09B
Long-Term Debt			3.83B	5.18B	12.49B
	Long-Term Debt excl. Capitalized Leases		3.08B	3.19B	8.27B
		Non-Convertible Debt	3.08B	3.19B	8.27B
		Convertible Debt	0	0	0
	Capitalized Lease Obligations		746M	1.99B	4.22B
Provision for Risks & Charges			-	457M	510M
Deferred Taxes			(123M)	344M	750M
	Deferred Taxes - Credit		-	1.81B	2.86B
	Deferred Taxes - Debit		123M	1.47B	2.11B
Other Liabilities			1.53B	1.22B	1.66B
	Other Liabilities (excl. Deferred Income)		1.42B	1.22B	1.66B
	Deferred Income		108M	-	-
Total Liabilities			24.36B	31.65B	45.6B
Non-Equity Reserves			0	0	0
Preferred Stock (Carrying Value)			0	0	0
	Redeemable Preferred Stock		0	0	0
	Non-Redeemable Preferred Stock		0	0	0
Common Equity (Total)			8.19B	9.75B	10.74B
	Common Stock Par/Carry Value		5M	5M	5M
	Retained Earnings		1.92B	2.19B	1.95B
	ESOP Debt Guarantee		0	0	0
	Cumulative Translation Adjustment/Unrealized For. Exch. Gain		(250M)	(187M)	(512M)
	Unrealized Gain/Loss Marketable Securities		11M	2M	1M
	Revaluation Reserves		0	0	0
	Treasury Stock		(1.84B)	(1.84B)	(1.84B)
Total Shareholders' Equity			8.19B	9.75B	10.74B
Accumulated Minority Interest			0	0	0
Total Equity			8.19B	9.75B	10.74B
Liabilities & Shareholders' Equity			32.56B	41.4B	56.34B

Amazon.com Inc.
Cash flows from operating activities:			2012	2013	2014
Net Income before Extraordinaries			(39M)	274M	(241M)
Depreciation, Depletion & Amortization			2.16B	3.25B	4.75B
	Depreciation and Depletion		1.65B	2.46B	3.62B
	Amortization of Intangible Assets		506M	793M	1.13B
Deferred Taxes & Investment Tax Credit			(265M)	(156M)	(316M)
	Deferred Taxes		(265M)	(156M)	(316M)
	Investment Tax Credit		-	-	-
Other Funds			802M	1.34B	1.68B
Funds from Operations			2.66B	4.71B	5.87B
Extraordinaries			-	-	-
Changes in Working Capital			1.52B	767M	974M
	Receivables		(861M)	(846M)	(1.04B)
	Accounts Payable		2.07B	1.89B	1.76B
	Other Assets/Liabilities		275M	399M	741M
Net Operating Cash Flow			4.18B	5.48B	6.84B
Investing Activities
			2012	2013	2014
Capital Expenditures			(3.79B)	(3.44B)	(4.89B)
	Capital Expenditures (Fixed Assets)		(3.79B)	(3.44B)	(4.89B)
	Capital Expenditures (Other Assets)		0	0	0
Net Assets from Acquisitions			(745M)	(312M)	(979M)
Sale of Fixed Assets & Businesses			-	-	-
Purchase/Sale of Investments			935M	(520M)	807M
	Purchase of Investments		(3.3B)	(2.83B)	(2.54B)
	Sale/Maturity of Investments		4.24B	2.31B	3.35B
Other Uses			0	0	0
Other Sources			0	0	0
Net Investing Cash Flow			(3.6B)	(4.28B)	(5.07B)
Financing Activities
			2012	2013	2014
Cash Dividends Paid - Total			0	0	0
	Common Dividends		0	0	0
	Preferred Dividends		0	0	0
Change in Capital Stock			(960M)	0	0
	Repurchase of Common & Preferred Stk.		(960M)	0	0
	Sale of Common & Preferred Stock		0	0	0
		Proceeds from Stock Options	0	0	0
		Other Proceeds from Sale of Stock	0	0	0
Issuance/Reduction of Debt, Net			2.79B	(617M)	4.43B
	Change in Current Debt		0	0	0
	Change in Long-Term Debt		2.79B	(617M)	4.43B
		Issuance of Long-Term Debt	3.38B	394M	6.36B
		Reduction in Long-Term Debt	(588M)	(1.01B)	(1.93B)
Other Funds			429M	78M	6M
	Other Uses		0	0	0
	Other Sources		429M	78M	6M
Net Financing Cash Flow			2.26B	(539M)	4.43B
Exchange Rate Effect			(29M)	(86M)	(310M)
Miscellaneous Funds			0	0	0
Net Change in Cash			2.82B	574M	5.9B
Free Cash Flow			395M	2.03B	1.95B

Answer rating: 100% (QA)

Here are the cost function estimates for Netflix Inc and Amazoncom Inc using the following methods Method 1 Linear Regression In linear regression we ... View the full answer