Explanation of Objectives of GPFR
The main objective of GPFR as provided in paragraph OB2 of the IASB Conceptual Framework posits: the provision of financial info regarding reporting firm which remains useful to existing as well as likely equity-investors, lenders as well as additional creditors in making decisions relating to the provision of resources to an entity. Such decisions entail buying shares, selling shares or holding equity as well as instruments of debt, and provision or loans settlement alongside additional credit forms. The objectives of the GPFR include the provision of info regarding the financial position, performance as well as alterations in the financial position of the firm which is highly useful to a broad array of users when reaching economic decisions (Henderson, Peirson, Herbohn, & Howieson, 2015). Another useful objective of the GPFR is to showcase the outcomes of stewardship of the management/management accountability for entrusted resources. Another key objective is to assess the reporting firm’s compliance with the legislation, common law, regulation as well as contractual arrangement.
The objective of the GPFR is to ensure that financial statements avail info regarding financial position, performance as well as cash-flows which is useful to a broad array of consumers to allow them make economic- related decisions. These objectives are relevant to the Amazon case above as such users include existing as well as potential investors, creditors and lenders. The users of such information must make the economic decisions on the basis of the evaluation of the firm’s ability to generate cash as well as cash equivalent as well as of the timing alongside certainty of corresponding generation. The ability to eventually determine, for instance, the Amazon’s capacity to pay its workers as well as suppliers, meet the payment for interest, as well as loan repayment alongside making distribution to owns is of great importance to the users (Pelger, 2016). The users are better capable of evaluating this ability for Amazon to generate cash as well as cash equivalents in case they are provided with the info that focus on financial position, performance as well as cash-flows of the Amazon.
As the GPFR emphasizes on the provision of useful financial information including those info regarding economic resources as well as claims against it, its objectives are really vital to Amazon. Such information as changes in the Amazon’s financial position that might be as a result of additional factors like financial performance or additional matters as raising debt remain increasingly of great significance. This enables the use of financial statement to recognize or identify the weaknesses and the strengths of the entity, and further to undertake the assessment of the Amazon’s solvency and liquidity to attract lenders. The information on financial performance of the Amazon based on the accrual accounting indicates the effects of the transactions alongside additional events on the organization’s assets as well as liabilities in the periods whereby such effects happen, even if the cash is received/paid in a diverse period. This is important as it enables the users to more relevant info relating to Amazon’s financial performance than utilizing the cash receipts terms. Information availed by the Amazon’s financial performance enables the users of the financial statements to asses management performance, ability to generate cash as well as risks linked to the business, and how they might affect Amazon. The cash flow management is also critical information provided as another key part of performance.
Relevance of Objectives to Amazon
Under the concept of accruals, the transactions like sales as well as purchases are recorded in period of their incurrence (FASB, 2012). This does not reveal to the users information concerning when the money is due to be received from the clients or customers, or paid to the suppliers. Via the review of cash flow info, the users of the financial information will be able to undertake the assessment of the Amazon’s ability to generate cash inflows, and how the firms spend cash. The cash is linked to solvency of the Amazon; a profitable firm like Amazon might be insolvent in case it fails to possess adequate funds for its debt payment. This might happen if it provides more credit than the firm receives, and does not have adequate cash to bridge the difference.
The historical cost concept is valuating assets at their original cost. The asset purchased is initially recorded in the books of accounts at the original cost/transaction price. Accordingly, reporting period, the asset is reported and measured at the similar amount in the balance sheet of the company. Despite the appreciation in value of assets over time, the historical costing does not recognize such increases and decreases in values under such concept of accounting (Ellul, Jotikasthira, Lundblad & Wang, 2015). The historical cost concept has an advantage of objectivity and reliability as well as simplicity and convenience alongside consistency and comparability of accounting information. The objectivity and reliability of accounting information. As appeared in the case Jeff Bezos seems to employ the conservative accounting unlike the shareholders. This is because he seems to prefer the transactions to be recorded at their initial amounts and hence the needless of restating financial statement each year to reflect alterations in value. It is also simple and convenience to record transactions at original amounts.
The financial-statements are unclouded with subjective surges as well as decline in value. No data-manipulation room because of the presence of an objective basis of recording business transactions. It allows Bezos to enhance reliability of accounting information as reported amounts are easily verifiable (Greenberg, Helland, Clancy & Dertouzos, 2013). The shareholders do not appear to prefer the historical costing but aggressive one. This is due to the limitations of the historical cost accounting. For example, no regard for changes in price level, impractical fixed-asset values, inadequate depreciation provision, improbable profit, holding and operating gain mix up as well as inability to present financial position fair value. For example, there is no revelation of true profit in statement of income. Revenue will only be documented on current-value basis while expenses are documented based on historical cost.
Preferences of Jeff Bezos and Shareholders for Accounting Methods
Overstatement of profits in the course of inflation. The shareholders will thus appear to be cheated in terms of dividend. Moreover, holding gain/losses needs to be segregated from the operating gain/losses in the determination of true-operating performance (Zeff, 2007). No regard for changes in price level under historical-cost accounting since statement merely state historical facts. Shareholders would be happy to see the prices levels considered since alterations in money value because of alteration in general price level are disregarded. This is because they fail to provide true as well as fair image of affairs of Amazon. The impractical values of fixed-assets are never documented and presentation done at obtained prices. Alterations in market-value of these assets will be disregarded and this will never reflect the true position of the firm.
CMR remains an important activity for the firms since it allows the firms to offer useful commodities for target consumers. This is a focused as well as logical mechanism that improves the profit-making likelihoods of firms. The firm is able to earn additional dividends while simultaneously minimizing the risks due to capital markets research. The biggest pros of CMR is the creation of effective communication amidst firms and customers. The customer reaction to an array of services offered by companies will be measured because of capital market research. The CMR is essential in investment decisions in capital market, accounting standards establishment as well as corporate financial-disclosure decisions. The shareholders’ negative reactions to the inability of the Amazon to generate profits can be understood on the basis of the CMR.
The shareholders think that CMR should be used to eliminate the incorrect policies as well as look forward to explore the fruitful steps (Kothari, 2001). CMR is able to help Bezos with location of the promising opportunities via researching market to regain confidence of the investors who are increasingly worried. If Amazon CEO could have undertaken effective CMR prior to launching his ambitious strategies then the company would have then stand the better chance to get a good profit return. The shareholders feel that the lack of CMR could be accounting for the lack of risk minimization which is another reason for CMR. Via this CMR, the real market needs as well as the overall public could have been assessed as well as commodities and strategies made extremely demand-oriented. Amazon needs to analyse whether it is making a progress in right direction.
Reaction of Shareholders to Earnings Announcement
The CMR would have helped Amazon if done early enough thereby avoiding the problems that are currently facing the firm. This is because it would have helped find the companies as well as stock-prices which might best ensemble the financial condition of investor. The investment would otherwise have the required information including its profile that can be studied effectively alongside the size of the firm which are both significant parameters of stock market investment research. These would have informed the firm’s strategies to solve the problem of being a high cost margin that hinders the profits if achieved to be comparatively small which worry the shareholders. The earnings announcement negatively shocked the shareholders and this can be clearly attributed to the lack of prior and effective CMR making the firm to be under intense fire.
The lack of effective CMR makes the CEO to engage in strategies that makes the sales growth insufficient leading to less profits and lack of benefits to the investors. This is why there was increasing pessimists on Wall Street due to the unpromising underlying figures for the unprofitable online retailer (Amazon) despite the report on earnings looking greater (Bodie, 2013). The shares plummeted subsequently to about eleven percent thereby knocking 3.5 billion dollars off the fortune of Jeff Bezos (presently at 29.30 billion dollars) subsequent to 27% cents loss per share, even much worse than the consensus estimates of fifteen cents. The lack of CMR can be said to have informed the shareholders perpetual lack of interest to turn a continual profit and diminishing gross margins-which is even anticipated to decline further provided Amazon’s ambitious investing in novel areas-sparking concerning among the analysts. This explains the lack of patience among the investors with respect to the ongoing margin pressure (James, 2015).
Heuristics are efficient thinking strategies that are a mental shortcut which assist people to make decisions as well as judgments swiftly without having to spend a substantial time researching as well as analyzing information. Heuristics helps in the making of decisions and judgments each day with respect to trusting someone, doing something, route to take, how to respond to an upset person among others (Renjilian, Womer, Carroll, Kang & Feudtner, 2013). There are various categories of helpful heuristics such as availability, representativeness as well as base-rate. Availability heuristics describes a mental shortcut that will assist an Amazon investor to make a decision on the basis of ease of bringing an item to mind. Simply put, the investor can often relay on the ease of thinking of the instances where he makes judgment or decision. The challenge with it is that an investor can make an assumption that where many instances are in abundance in his mind, an event or subject- matter is conventional (Wambaugh, Wang, Dionisio, Frame, Egeghy, Judson & Setzer, 2014).
Using Heuristics to Decide on Buying, Selling, or Holding Amazon Shares
Nonetheless, many situations befits application of availability like this case of Amazon which makes it useful as well as accurate. Availability heuristics is part of what makes an investor careful in dangerous situations since he will check another investor’s earlier decision or judgment to buy, sell and hold shares that might have ended badly to be more probably to be cautious as well as better protect himself. The second category is representative heuristics is representativeness heuristic. This category is a mental shortcut that assists the investor to make a decision or judgment by comparing information to investor’s mental prototypes (Hauser, 2014). This category will help an investor in this case to save his time and energy. The Base-Rate heuristic is another useful category which is a mental shortcut which assist an investor in deciding or judging to sell, buy or hold Amazon shares on the basis of the probability. This calls for an investor to make assumption regarding the decision or judgment to be made with respect to buying, selling or holding the Amazon shares.
A critical accounting describes a policy that remains both extremely significant to display of Amazon’ s financial conditions and results, and calls for management’s increasingly challenging, subjective or complex judgments. The circumstances which make such judgments challenging, subjective and/or complex aligns to the need to make the estimations regarding the impacts of issues which are uncertain inherently. Since an array of variables as well as assumptions that affect the probable future resolution of uncertainties, such judgment turns even to increasingly subjective as well as complex. The financial statements preparation in Amazon is in conformism with GAAP. This needs the estimation as well as axioms which impact reported liabilities and assets figures, revenue as well as expenses (Haslam, Butlin, Andersson, Malamatenios & Lehman, 2014).
Amazon uses such policies of critical accounting that adopts the utilization of estimates, judgment as well as assumption that remain important in understanding Amazon results. In terms of revenue recognition, Amazon recognizes revenue from sales of product or rendered services as they follow four revenue recognition criteria are achieved: existence of convincing evidence of arrangement, incidence of delivery/services offered, fixed selling price/determinable, and assured reasonable collectability. Arrangements of revenue with multifaceted deliverables are further subdivided into distinct accounting units in case deliverable in arrangement meet such issues: item delivered has value to clients on the standalone framework, existence of objective and reliable fair value evidence of undelivered products as well as probable delivery of any item undelivered. The firm periodically give incentive offers to its customers as an encouragement for purchases. These offers entail present discount offers, like percentage discount off current purchases, and inducement offers like offers of future discounts based on the minimum current purchase, and additional identical offers. Inventories, entailing availability of products for sales are accounted for utilizing FIFO method, and valued at lower cost/market value.
Critical Theory Perspective on Accounting and Accountants in Amazon
Amazon has to make judgment to undertake this valuation on the basis of currently-existing info regarding the probable disposition method like via sales to individual customers, product vendor’s returns or liquidations as well as anticipated recoverable values of every disposition group. Accordingly, Amazon adjusts carrying amount of its inventory to market value or lower of cost. Amazon employs stock-oriented remuneration by measuring remuneration cost for stock-awards at the fair-value as well as recognizing remuneration over service-period for the awards anticipated to vest (Brasel, Doxey, Grenier & Reffett, 2016). The fair value of both restricted stock alongside restricted unites is determined as well on the basis of number of shares they grant and quoted price of its common stock.
Amazon primarily issue restricted stock units to its workers thereby reducing at a great deal the complexity of valuation matters for stock compensation. Amazon uses accelerated method instead of a straight line method to recognize compensation expense where over fifty percent of compensation cost would be expenses in 1st year of a 4 year vesting term. Amazon subjects to income taxes in both United States alongside various foreign jurisdictions. Amazon acknowledges the need for significant judgment when evaluating tax positions as well as determining its income taxes’ provision. They include such provision as impact of reserve alongside alterations to reserve which are regarded relevant (Hammond, Danko & Landis, 2014).
References:
FASB. (2012). Qualitative Characteristics of Accounting Information.
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B. (2015). Issues in financial accounting. Pearson Higher Education AU.
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.
Ellul, A., Jotikasthira, C., Lundblad, C. T., & Wang, Y. (2015). Is historical cost accounting a panacea? Market stress, incentive distortions, and gains trading. The Journal of Finance, 70(6), 2489-2538.
Greenberg, M. D., Helland, E., Clancy, N., & Dertouzos, J. N. (2013). Fair Value Accounting, Historical Cost Accounting, and Systemic Risk. Rand Corporation.
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Renjilian, C. B., Womer, J. W., Carroll, K. W., Kang, T. I., & Feudtner, C. (2013). Parental explicit heuristics in decision-making for children with life-threatening illnesses. Pediatrics, 131(2), e566-e572.
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Hammond, T., Danko, K., & Landis, M. (2014). Social Accounting and Accounting Textbooks: Professors’ Responsibility to Promote the Interests of Students. In Managing Reality: Accountability and the Miasma of Private and Public Domains (pp. 145-185). Emerald Group Publishing Limited.
Haslam, C., Butlin, J., Andersson, T., Malamatenios, J., & 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.
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