1: The major GPFR objective: to avail useful financial info about reporting company to current and prospective equity-investors, creditors and lenders to make decisions about providing resources to the company. These decisions comprise buying, holding equity and selling shares besides holding instruments of debt. The decision also entails providing loan and settling them and other types of credit. GPFR also aims at showcasing outcome of management stewardship alongside management accountability of resources entrusted on them. GPFR also aims at assessing the compliance of the reporting company with common law, legislation, regulation and contractual agreement (FASB, 2012). Another objective is to make sure that financial statements (FS) avail useful info on financial position, performance and cash-flow to a vast range of stakeholders thereby permitting them to make rational decisions.
These are essential objectives to Amazon situation. This is because its consumers can understand the company financial position, performance and cash-flow. The consumers of use such info to make decisions by evaluating the capability of Amazon to produce cash alongside cash equivalent and timing and future generation certainty. The info will allow to consumers gauge Amazon ability to pay its employees and supplies as well as whether Amazon can pay for interest and repay loans. Consumers of Amazon’s financial info can then be in a position to evaluate whether if they invest in the company, they will have ROI.
GPFR puts emphasis on useful financial info provision which include info on resources (economic) alongside claims on this resource. This makes these objectives really essential to the firm. Information on financial position changes of Amazon can be due to extra aspects including financial performance and other issues like increase in debt. This is significance to investors, lenders and even creditors when making decisions about Amazon’s shares. Lenders, for example, will be able to acknowledge the Amazon’s strengths and weaknesses in terms of debt payment. Lenders will also assess the solvency as well as liquidity of Amazon to decide on whether to lend company.
The users of financial info can access the financial performance info of Amazon based on accrual accounting. This is a useful piece of info when stakeholder asses the impacts of Amazon’s transactions and other events on Amazon’s assets alongside liabilities in respective period of occurrence irrespective of cash received or paid in a different period. Users will understand financial performance of Amazon unlike where they utilize cash receipts basis. Investors can then assess the financial performance of Amazon management and risks facing Amazon before investing in the firm. Understanding the cash- flow management in Amazon through the information it provides can also help evaluate its performance to allow lenders to make rational decision.
The transactions such as sales and purchases are recorded in respective periods when they are incurred based on accruals concept. Such a practice, however, fails to unravel the information to the users when funds are due for receipt from respective client or when funds are due to be paid to suppliers. Users will review cash-flow info to assess the ability of Amazon towards cash-inflows generation and its respective spending. The users will gauge Amazon’s solvency based on spending and generation of cash by looking at its liquidity (Pelger, 2016). They will make a decision on whether Amazon is solvent or insolvent by looking at the adequacy of funds it holds to service its debts. The information will then help users to check whether Amazon give much credit than what it receives, and whether the company has sufficient cash for bridging the variance.
FASB. (2012). Qualitative Characteristics of Accounting Information.
Pelger, C. (2016). Practices of standard-setting–An analysis of the IASB's and FASB's process of identifying the objective of financial reporting. Accounting, Organizations and Society, 50, 51-73.
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2: The concept of historical cost uses the original cost to valuate assets. The purchased asset will be first recorded in account books at the original cost or price of transaction. The period for reporting is recorded and the asset is measured at same amount when shown in balance sheet. No depreciation or appreciation in assets value is recognized. The method of historical cost is beneficial due to its reliability and objectivity. The technique also shows simplicity alongside convenience. It shows accounting info consistency and comparability. Jeff Bezos appears to be using conservative accounting while stakeholders prefer aggressive methods. Jeff appears to have preference for the transactions being recorded at original amounts. Thus it is pointless to restate financial statement every year to echo value changes. Historical costing remains a simple and convenience method as transactions are merely recorded at transaction prices (Zeff 2007).
Historical costing does not cloud FS with subjective increases and decrease in value. The methods prohibits manipulation of data by using objective framework to record transaction. Bezos was able to improve reliability due to verifiability of the amount reported. Amazon’s shareholders are opposed to Jeff’s conservatism approach and advocate for aggressive costing. They see much shortcomings with Jeff’s approach. Historical costing disregard fluctuation in price level. The recorded fixed assets show unrealistic values and have no sufficient provision for depreciation (James 2015). No realistic profit recorded and jumbled operating and holding-related gains. It is unable to present fair-value of financial position. Historical costing does not reveal true Amazon’s profit in income statement. It merely record revenues on current-value basis and records expenses on transaction price. The method overstates profits in the face of inflation.
Shareholders feel short-changed when profits are overstated since it does not reflect the right dividend. Failure to separate holding gain and losses from operating gain/losses is inappropriate since it hampers true-operating performance determination. They disregard the fluctuation on price level because statement only restate facts historically. Amazon’s shareholders will be excited when fluctuation in prices is considered to appreciate money value (Ellul, Jotikasthira, Lundblad and Wang 2015). Shareholders will see true picture and fair image of Amazon’s affairs. The fixed-assets values fail to be recorded nor presented at transaction prices. Variations in asset market-value shall be negated hence fail to depict true firm’s position.
Ellul, A., Jotikasthira, C., Lundblad, C. T., and Wang, Y. 2015. Is historical cost accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal of Finance, 70(6), 2489-2538.
James, J. A. 2015. Money and capital markets in postbellum America. Princeton University Press.
Zeff, S. A. 2007. The SEC rules historical cost accounting: 1934 to the 1970s. Accounting and Business Research, 37(sup1), 49-62.
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3: CMR is an essential activity for companies. The method helps companies to provide useful goods and services for consumers targeted. It is a straightforward and reasonable method to enhance profit-making possibilities. Amazon can earn extra dividends and at the same time, minimize risks because of CMR. CMR’s main strength is the ability to create efficient communication that connects firms and respective clients. The feedback and comments emanating from customers on products or services rendered can be measured due to CMR. The research is imperative when making a decision to invest, especially in creating accounting standards and capital markets investment and disclosure among corporates.
Amazon’s shareholder reacted negatively to the earning announcement because they felt the company did not undertake effective CMR to inform positive profits that can raise enough dividends. Shareholders are worried and ask themselves whether CMR is being used in the firm to get rid of unworking policies and inform future profitable growth strategies. The shareholder are rational and hold that CMR can assist Jeff to locate fruitful business opportunities (Wambaugh, Wang, Dionisio, Frame, Egeghy, Judson and Setzer 2014). This can restore the investors’ confidence and decide to invest in Amazon as they are currently a worried lot. Jeff seems not to have done effective CMR to inform the launch of his ambitious strategies. The shareholders feel that CMR would have resulted in better profit to be shared as dividends. The inability of Amazon to use CMR is held by shareholders as an account for the presence of risks of investing in the company due to fear of lack of ROI. CMR could have informed Jeff to focus on real market needs and those of the public to inform the kind of strategies and commodities that could boost the sales and hence realistic profits. Through CMR, Amazon can determine its progress path as either being in the correct course or not and this will help make adjustments correctly to gain the confidence of the shareholders.
Proper application of CMR would have assisted Amazon to identify problems and addresss them early enough. The reason being, CMR could have informed the stock-prices that meets the investor’s financial status hence trigger investment. This would have given the investors the required information such as profile of the company and size of the firm, essential parameters for investors to fathom investment in stock market. The information derived from CMR could have been significant in helping Jeff get solutions to Amazon extreme cost margin to allow sufficient profit generation. The shareholders were greatly shocked at the earnings announcement which is rationally attributable to disregard of CMR that landed Amazon to be under fire (Greenberg, Helland, Clancy and Dertouzos 2013).
Jeff could have irrationally adopted strategies that were not supported by CMR hence leading to inadequate sales growth. This barred Amazon from attaining adequate profits hence no ROI to the investment by the shareholders. This could account for pessimism on Wall Street as a result of unpromising profit figures that Amazon realized hence watering down the great-looking earning report. Amazon shares fell afterward to around 11 cents and hit 3.5 billion dollars below the Jeff’s fortune of 29.30 billion dollars. The shares later hit 27 cents loss a share which was in essence, worse than estimates (15 cents) of consensus. Insufficient use of CMR in Amazon informed the shareholders’ continuous loss of interest in Amazon to generate enough profit and declining gross margins. This is further expected to worsen given the firm’s ambitious investment in new areas that sparked concerns among the analysts. This gives an explanation of the absence of shareholder’s patience in terms of current pressure on margin (Kothari 2001).
Greenberg, M. D., Helland, E., Clancy, N., and Dertouzos, J. N. 2013. Fair Value Accounting, Historical Cost Accounting, and Systemic Risk. Rand Corporation.
Kothari, S. P. 2001. Capital markets research in accounting. Journal of accounting and economics, 31(1), 105-231.
Wambaugh, J. F., Wang, A., Dionisio, K. L., Frame, A., Egeghy, P., Judson, R., and Setzer, R. W. 2014. High throughput heuristics for prioritizing human exposure to environmental chemicals. Environmental science & technology, 48(21), 12760-12767.
4: Heuristics describes efficient and effective strategies for thinking that remain a mental shortcut that help individuals to reach rational decisions alongside judgments speedily without having to devote a considerable amount of time in research besides examining info. Heuristics assist in making decisions beside judgments on a daily basis in terms of trusting somebody, undertaking something, route to be taken, and how one responds to a person who is upset. Several categories of helpful heuristics including availability, representativeness and base-rate. All these types are available for the Amazon investor (Henderson, Peirson, Herbohn and Howieson 2015). Availability heuristics is the mental shortcut which shall help the Amazon investor to make a decision based on comfort of getting something in his mind. The investor will frequently rely on an affluence of thinking of examples where a person makes a decision or judgment. However, this heuristic has a challenge since an investor may assume that if several examples are in his mind, a particular event/ subject-matter becomes predictable. However, this heuristics fits various situations including the Amazon’s case thus making it essential and accurate. Availability heuristics is an integral part of what will make Amazon investor to be extremely careful in precarious circumstances because the investor shall check another colleague’s past decision/judgment concerning buying shares, selling shares and holding equities which might have badly ended. This makes the investor increasingly cautious and better safeguard himself (Hauser 2014).
The other category can be representativeness heuristics. It is a mental shortcut which helps an investor to reach a decision/judgment through the comparison of information to his mental prototypes. It shall assist an Amazon investor to devote less time and energy when deciding and judging. The Base-Rate heuristic is also valuable category that is a mental shortcut able to help an Amazon investor to make his decisions or judgment to sell shares, buy shares or hold equities in terms of the likelihood. This dictates that an investor assumes about judgment or decision being made in terms of selling, buying or holding equities.
Hauser, J. R. 2014. Consideration-set heuristics. Journal of Business Research, 67(8), 1688-1699.
Henderson, S., Peirson, G., Herbohn, K., and Howieson, B. 2015. Issues in financial accounting. Pearson Higher Education AU.
5: A critical accounting relate to the policy that is both tremendously noteworthy for exhibition of Amazon’ s financial situations and outcomes, and demands for management’s progressively thought-provoking, idiosyncratic or multifaceted judgments. The situations which make those decisions puzzling, personal and/or compounded bring into line to the need to make the estimations concerning the influences of matters that are indeterminate essentially. Because of factors alongside assumptions which upset the likely future resolve of qualms, such judgment become progressively personal as well as intricate. The preparation of FS in Amazon complies with GAAP.
Amazon employs policies of critical accounting which embrace the use of approximations, judgment alongside assumption which is significant in comprehending Amazon outcomes. Based on revenue recognition, the Company recognizes its revenue from sales of product or rendered services. There are particular criteria that must be achieved before revenue is recognized: existence of convincing evidence of agreement, occurrence of delivery/services presented, constant selling price, and certain sensible collectability. Revenue arrangement with multi-layered deliverables are additionally segmented into separate accounting units where deliverable in arrangement meet such issues: item delivered offer value to clients on detached agenda, available of objective alongside reliable fair-value indication of not delivered goods and likely delivery of a given item not delivered. Amazon occasionally avail incentive offers to its clienteles as an inspiration for consumptions. Such offers involve current discount-offers, like % discount off present purchases, alongside enticement offers as offers of upcoming discounts on the basis of minimum present purchase, and extra undistinguishable offers. Inventories involving availability of goods for sales remain accounted for using FIFO technique, and valued at market value.
Amazon must judge to do this valuation based on prevailing info concerning the likely disposition technique such as through sales to separate customers, commodity vendor’s earnings or insolvencies and expected recoverable values of each disposition collection. Amazon undertake the adjustment of inventory carrying amount to market value (Haslam, Butlin, Andersson, Malamatenios and Lehman 2014). The firm uses stock-oriented compensation by gauging compensation cost for the stock-awards fair-value alongside recognizing compensation over service-duration for the prizes expected. The fair-value of restricted stock besides restricted units is obtained and in terms of shares quantity they grant and price quoted.
The Company chiefly issue restricted stock units to its workers thereby reducing the complexity of valuation matters for stock remuneration. Amazon employs accelerated method in place of a straight-line technique when recognizing compensation expense where over 50% of compensation cost would be expenses in year 1 of a 4 year period. Amazon complies with taxes on income in United States and several foreign jurisdictions (Bodie 2013). Amazon recognizes the need for momentous judgment during the evaluation of tax positions and obtaining its income taxes’ provision. These encompass provisions like reserve impact and changes to reserves that are relevant.
Bodie, Z. 2013. Investments. McGraw-Hill.
Brasel, K., Doxey, M. M., Grenier, J. H., and Reffett, A. 2016. Risk disclosure preceding negative outcomes: The effects of reporting critical audit matters on judgments of auditor liability. The Accounting Review, 91(5), 1345-1362.
Haslam, C., Butlin, J., Andersson, T., Malamatenios, J., and Lehman, G. 2014, September. Accounting for carbon and reframing disclosure: A business model approach. In Accounting Forum (Vol. 38, No. 3, pp. 200-211). Elsevier.