Accounting Theories and Amazon Case Study

This assignment examines various accounting theories - positivist, normative, and critical - and applies them to the case of Amazon. It explores how these theories influence financial statement preparation and interpretation, particularly in light of Amazon's declining share prices in 2014. The analysis emphasizes the consideration of stakeholder returns, present information (like market-priced inventory), and the impact of economic and political factors on accounting practices.

ACCT20074 Final Assignment
Term 2, 2017
Student ID:………………………………. Student name……………………………………………………..

Question 1: There are several possible objectives for general purpose financial reporting. Explain what these objectives
might be, and which one you think best applies to Amazon’s financial reporting (based on the information in the case
study). Make sure that you fully explain your answer.
Answer: Your answer is written here.
The objective of financial reporting is to make the stakeholders aware of the financial performance of an organization.
The various types of stakeholders include customers, managers, shareholders and regulatory bodies. Shareholders need
financial statements to understand, whether the organization is capable of returning their investments. The parameters,
which highlights the financial standings of a company comprise income per share along with return on capital employed
and net profit (EY, 2010). Financial reporting tends to explain the facts that on whether the standards of the final reports
have been complied with the legislations passed by the accounting bodies (Crown Copyright, 2015).
Managers use financial statements making important business decisions. For example, the present trend of costs and
profits enable them to ascertain that the business operations are running smoothly and are scheduled as per the plans. In
case, if the profit level is observed to be low, then cost rises. Hence, it becomes reasonable to revise the entire process of
cost control. The managers use income statement for the preparation of cash flow accounts. It reflects about the
movement of cash that exists in the organization. Apart from determining the present status, the financial standards of
reporting often enables the managers to take right decisions regarding future activities. Budgets can also be considered to
be a product that allows the managers and top level executives to keep their costs under control. Other than investors,
creditors often use financial statements to know that whether a business is capable enough to return the loans and
advances. It includes the suppliers and banks (McGraw-Hill Global Education Holdings, LLC, 2017).
The given case study explains that one of the prime objectives of the financial reporting pertaining to Amazon is to create
awareness among the investors regarding the performance of the company. This is mostly because there has been an
extensive focus on the return to investors. During 9/22/2017, Amazon experienced a fall with respect to its stock price by
1.05%. Such instances are can lower the confidence of investors. It led to further shrinkage in the value of shares of the
company. The shrinkage in the stock price was much lower than expected, which enhanced issues for the Chief Executive

Officer (CEO). Such instances are observed to make the investors impatient. Investors were observed to be reluctant in
making further investments until there has been rise in the amount of gross profit to the level of operating income.
Operating income is calculated by deducting depreciation from gross profit. Concerns of the CEO-Jeff Bezos, of Amazon
believed that further investments is supposed to cause decline in the levels of earnings and profits resulting to shrink the
share price. This clearly indicates that the key intention of financial reporting was to create awareness among the
shareholders (Schaefer, 2014).
The case study mentions regarding the fact that there has been a rise in the revenue earnings of Amazon during 2014, but
it has not been possible to gain confidence of the investors. It is thus observed that although, Amazon has provided a
return of 700% to the investors over the last ten years but retardation in the level of profit and revenue has created a
significant problem for the investors. Therefore, the company’s company also mentioned about the initiatives that are
likely to increase the share price of the online retailer. For example, the CEO has focused on concentrating its resources in
the areas of grocery delivery, as it provides opportunities for rise in profit level and earnings. The CEO appears to be quite
tensed regarding the facts that share prices are not always in a bullish situation. The initial public offering (IPO) done by
Alibaba is supposed to curtail down investments, as investors tend to shift stock trading from Amazon. To conclude, it can
be asserted that the management of Amazon uses financial related reporting to reveal the investors about its
performance (Schaefer, 2014).
References:
Crown Copyright. (2015). Treasury instructions 2015. Publications, 1-78.
EY. (2010). Supplement to IFRS outlook. Publications, 1-4.
McGraw-Hill Global Education Holdings, LLC. (2017). Objectives of financial reporting. Retrieved September 25, 2017, from
http://highered.mheducation.com/sites/0072994029/student_view0/ebook/chapter1/chbody1/
objectives_of_financial_reporting.html
Schaefer, S. (2014). Amazon under fire: what happens when sales growth isn't enough?’ ). Retrieved September 25, 2017,
from http://www.forbes.com/sites/steveschaefer/2014/07/25/amazon-under-fire-what-happens-when-sales-growth-isnt-
enough/

Question 2: From the case study, it appears that the CEO of Amazon, Jeff Bezos, might be receiving bonus
company stock based on accounting outcomes (reported profit, for example, or share price performance). Let
us assume for now that this is true. Would Jeff Bezos or Amazon's shareholders prefer Amazon to use
conservative accounting methods such as historical cost? Fully explain the likely preferences of both parties.
Answer: Your answer is written here.
The CEO of Amazon, Jeff Bezos is observed to receive bonus or stock option plan, as it is mentioned that he
obtained an income of $29.3billion from the company as on 2014. His return is observed to decrease due to fall in
the share price caused by declining profit and earnings (Schaefer, 2014).
Conservative methods of accounting clearly states that that there is a proper requirement of maintaining scrutiny,
so that all the probable chances are easily detected. It further mentions that the financial statements must
contain information relating to expenses and revenues of a particular period. It is clearly depicted that losses must
be recorded and there is no such need of including the expenses. This is because timely measures can be taken for
mitigating away the losses that is to be incurred in the future. Thus, it can be concluded that the principle of
conservatism is truly applicable from perspective of shareholders and the CEO. In a situation, when there has
been a fall in the share price due to slump in operating profit, making it essential for making a detailed account for
the losses that are faced by Amazon. This in turn will assist in reducing the chances of losses that can be faced by
Amazon (VLE, n.d).
Precisely, it is important for the management to focus on the factors, which are responsible for lowering the
revenue, profits and shareholders’ return of the company during the year 2014. It can be due to rise in operating
costs, enhancement in tax rate or ineffective expenditures made on promotions. Thereafter, the management has
to take remedial steps, which are effective in covering the costs by earning large revenue. The various aspects of
losses that have to be considered by Amazon, while preparing the financial statements include providing provision
on account of bad debts, loss on issue of debentures, which have been issued at discount. Depreciation of assets
is also to be considered by the management while preparing the financial statements. Even a small amount of

expenses that are incurred on purchase of stationery have to be recorded in the books of accounts as per the
theory of conservatism (VLE, n.d.).
Amazon has to record even the minute things, which can lead to loss in the share prices. For instance, IPO by
other online retailers such as Alibaba is responsible for paving away investments to the competing business. There
are however, certain limitations of conservatism theory of accounting, which makes it inappropriate to use. For
example, excessive recording of expenses can cause fall in the recorded profit margin by a large amount. As a
result of this, the management can take certain remedial steps, which are unnecessary. It eventually would
decline the profit available to shareholders along with reducing the price of the company stock. Additionally, such
fall in the level of stock prices is depicted to reduce investor’s confidence and make them reluctant to invest in the
stocks in future. As a result, it would have been difficult for Amazon to raise funds from the equity market.
Scarcity of funds is further depicted to reduce the ability of Amazon to expand and improvise its existing online
retailing services. Thus, there is a need to use the conservatism principle of accounting in the most judicious
manner, so that the level of profits are neither overstated or understated (VLE, n.d.). Historical cost method of
accounting can be stated as a particular conservatism rule, wherein cost of an asset is recorded at the time of
purchased purchasing. Pertaining to Amazon, it can clearly be inferred that the method is not suitable. This is
because the approach does not involve any significant alterations s in the overall assets’ value based on the
current conditions of the market. As a result of it, effects on the share prices cannot be determined exactly (Rich &
Jones, 2017).
References:
Rich, J. & Jones, J. (2017). Cornerstones of financial accounting. USA: Cengage Learning
Schaefer, S. (2014). Amazon under fire: what happens when sales growth isn't enough?’. Retrieved September 25,
2017, from http://www.forbes.com/sites/steveschaefer/2014/07/25/amazon-under-fire-what-happens-
when-sales-growth-isnt-enough/
VLE. (n.d .). The prudence convention (conservatism). Retrieved September 25, 2017, from
http://vle.du.ac.in/mod/book/print.php?id=10997&chapterid=19929

Question 3: Use Capital Markets Research (CMR) to explain the reaction of Amazon’s shareholders to Amazon’s
earnings announcement.
Answer: Your answer is written here.
The situations prevailing in the market clearly explains that the level of profit had been lowered down for Amazon
during the year 2014. This particular situation reduced the price of shares in the stock market and turned down
willingness of the investors to invest further in Amazon. The fall in the prices of shares during the year was 11%.
Investors were already anticipating that such downturns are depicted to reduce the stock prices (Schaefer, 2014).
The research on capital market, which explains the phenomenon of the stock markets clearly state that there has
been loss in the value of the share as expected by the analysts. The management of Amazon reported that such
anticipations were not rational, as the analysts expected higher sales revenue as compared to the expected
amount. The earnings announcement of the online retailer clearly mentioned that there has been a loss of 95
cents in each share in 2014, whereas in the previous year the loss was only 9 cents. On the contrary, it was
evident that there was a rise in the revenue earnings in 2014 in comparison with 2013. Similarly, it was also
observed during the year 2014, cash inflow with respect to the operations hiked than the previous year of 2013.
The CEO was observed not to be bothered regarding the decisions taken by the investors after earnings
announcement in 2014 (Rosenfield, 2014).
Investors are observed to be quite tensed about the fall in share price that was noted after loss reported by
Amazon. This was because of the anticipation that Amazon did not take any initiative for upgrading its
performance. The total loss that was evitable to Amazon for was estimated to be over $15billion. This was mostly
due to of low investment or withdrawal of the investors in the equity market. Investors perceived that though the
online retailer would provide return on investment at an appropriate rate, but it would have been difficult to offer
the same within the due time. Investors paved away with their decision to invest in the shares of Amazon despite
the fact that the online retailer disclosed about its initiative to expand its operations in new areas such as

television and modern electronic gadgets (Mac, 2014).
The analysts of the leading market research group USB stated after the declaration of results for 2014, the
investors still had the intention to invest, when the gross profit will at least be equal to the operating income. This
is because rise in gross profit to the level of operating income indicates the hike in the profit available to the
shareholders. It can thus be considered as a situation of neutrality, when there is no such trade-off between profit
level and income available to the equity shareholders. The research on capital markets indicates that despite of
rise in the volume of trade in shares of Amazon, there has been low amount of investment. This was mostly
because there has been low amount of returns pertaining to each individual shares of Amazon. Investors just
ignored the fact that the market has been in bullish conditions on a long term basis, especially after declaration of
the earnings report by Amazon (Schaefer, 2014).
The reluctance and pessimistic views of the shareholders was also due to fall in the price-earnings ratio in 2014.
As per the reports mentioned by the capital markets research it was observed that there has low investment rate
despite the rise in the revenue earnings of Amazon. The same applies in this case and the problem was coupled
when it the report that profit level decreased. It was reported that shares were reduced by 10% in 2014 (Stewart,
2014).
References:
Mac, R. (2014). Caught in 'investment mode,' Amazon reports big earnings miss. Retrieved September 25, 2017,
from https://www.forbes.com/sites/ryanmac/2014/10/23/amazon-third-quarter-2014-earnings/
#67fb96d11031
Rosenfield, E. (2014). Amazon shares drop 13 percent on missed estimates. Retrieved September 25, 2017, from
https://www.cnbc.com/2014/10/23/amazon-earnings-95-cents-lost-per-share-vs-expected-eps-loss-of-
74-cents.html
Schaefer, S. (2014). Amazon under fire: what happens when sales growth isn't enough?’. Retrieved September 25,
2017, from http://www.forbes.com/sites/steveschaefer/2014/07/25/amazon-under-fire-what-happens-when-
sales-growth-isnt-enough/
Stewart, J. B. (2014). Amazon’s shrinking profit sets off a seismic shock to its shares. Retrieved September 25,

2017, from https://www.nytimes.com/2014/04/26/business/amazons-shrinking-profit-sets-off-a-seismic-
shock-to-its-shares.html
Question 4: Explain how an Amazon investor might use heuristics to decide whether to buy, sell, or hold
Amazon shares. To answer this, you should explain the various categories of heuristics available to the investor.
Answer: Your answer is written here.
Heuristic refers to use of intelligence for taking any decisions on particular aspects. The method is observed to
give practical solutions to any problem. It is however not necessary that the method will always provide an
accurate result. This is because results are obtained with the support of a learning approach or studying trends
(Rouse, 2017; Carvalho, Savransky & Wei, 2004). In the present case, it is clearly evident that the share price of
Amazon fell in 2014 by considerable extent due to fall in the profit level despite of rise in the revenue earnings.
Investors were mostly reluctant to invest further in the shares of Amazon, as they anticipated that it would cause
fall in the return available to shareholders. The use of heuristics methods can be used to understand about the
various decisions that an investor can take to base his/her future decisions pertaining to investment in Amazon.
An investor can make three types of decisions after noting the trend of falling share price of Amazon. It can be
hold, sell or invest further in the shares of Amazon. The decisions can be taken by perceiving the views of experts
or studying the reports that is published by the market research organizations providing detailed information on
situation of the capital markets and their future trends (Kliger & Kudryavtsev, n.d.).
The investors can hold or sell the shares rather than making further investments. Infact, there are various factors
which has to be considered by the investors pertaining to making investments in the shares of Amazon.
Foremostly, it depends on the risk taking attitude of the investors that whether they intend to buy shares. In case,
the investors are observed to have low risk taking attitude, then it is beneficial to reduce investments in the
shares. On the contrary, the investors must sell the shares, so that chances of future losses due to low return can

be mitigated. The heuristics do not explain that investors will be in a better off position on selling the shares. This
is because unanticipated rise in the stock price can be regarded as the opportunity cost of selling the shares
(Forbes, Hudson, Skerratt & Soufian, 2015; Wustenhagen & Menichetti, 2012).
In case the investors are risk takers, then they can hold the shares of Amazon. Later on, when the market will be
in a bullish situation then there is a need to make further investments or sell away the shares of Amazon. It is
supposed to provide large gains to the investors. For example, in case, if it is observed that the share prices of
Amazon increases by more than 20%, then there will be high rise in the level of profit that is apportioned to the
shareholders. Moreover, in situations when the investors focuses on taking high risks, then there is a need of
buying shares of Amazon when the market was at extremely bullish situation during 2014. Applying the rule of
heuristics, it can be stated that rise in the share price in future will lead to profit to the shareholders. On the
contrary, fall in the share price can lead to significant losses (Venkatapathy & Sultana, 2016; Ali, 2011).
The risk taking attitude can also be dependent on the thorough study of the market. In case, it is found that the
trend of online retailing shows that share prices rise after a period of downturn, then it is evitable to invest further
in the shares or hold investment (Su, Chang & Chuang, 2010; Kempf, Merkle & Niessen-Ruenzi, 2012). On the
other hand, in case, if the trend analysis discloses a fall in the share price after down turns then it is important to
hold further investments. The technique of heuristics can also be applied by taking suggestion from experts or
other investors (Smith
, Harrison & Mason, 2010).
References:
Abreu, M. (2014). Individual investors’ behavioral biases. Teaching Economics Working Papers, 1-55.
Ali, A. (2011). Predicting individual investors’ intention to invest: an experimental analysis of attitude as a
mediator. International Journal of Human and Social Sciences, 6(1), 876-883.
Carvalho, M. A., Savransky, S. D. & Wei, T. (2004). 121 heuristics for solving problems. USA: Lulu.com
Forbes, W., Hudson, R., Skerratt, L. & Soufian, M. (2015). Which heuristics can aid financial-decision-making?
International Review of Financial Analysis, 1-12.
Kempf, A., Merkle, C. & Niessen Ruenzi, A. (2014). Low risk and high return–affective attitudes and stock market‐

expectations. European Financial Management, 20(5), 995-1030.
Kliger, D. & Kudryavtsev, A. (n.d.). The availability heuristic and investors’ reaction to company-specific events.
Preliminary Version, 1-33.
Rouse, M. (2017). Heuristic. Retrieved September 26, 2017, from
http://whatis.techtarget.com/definition/heuristic
Schaefer, S. (2014). Amazon under fire: what happens when sales growth isn't enough?’. Retrieved September 25,
2017, from http://www.forbes.com/sites/steveschaefer/2014/07/25/amazon-under-fire-what-happens-
when-sales-growth-isnt-enough/
Smith, D. J., Harrison, R. T. & Mason, C. M. (2010). Experience, heuristics and learning: The angel investment
process. Frontiers of Entrepreneurship Research, 30(2), 1-14. .
Su, H. J., Chang, C. J. & Chuang, S. C. (2010). The effect of corporate image as an affect heuristic on investors. Asia
Pacific Management Review, 15(3), 453-476.
Venkatapathy R. & Sultana, A. H. (2016). Behavioural finance: Heuristics in investment decision. TEJAS Thiagarajar
College Journal, 1(2), 35-44.
Wüstenhagen, R. & Menichetti, E. (2012). Strategic choices for renewable energy investment: Conceptual
framework and opportunities for further research. Energy Policy, 40, 1-10.
Question 5: Critical theorists view accounting very differently to positive or normative theorists. Use critical
theory to explain how Amazon uses accounting and accountants for its own purposes.
Answer: Your answer is written here.
Accounting is generally done to gather insights about the financial performance of the organizations. In other
words, it can be stated that accounting enables to trace the issues existing in the organizational strategies, which
is lowering down the level of profit (Garg, n.d.). The positive theory of accounting states that financial statements

must be made in the most rational manner. In other words, it explains regarding the need of considering a
particular method of accounting, which helps in creating value for the business. It further states that the
stakeholders must be able to draw meaningful inferences from the financial statements. For example, the
shareholders must be aware of the earnings per share and profit available to stockholders. Positivist theory of
accounting considers the need of mentioning about the reasons for which a particular method has been chosen
for preparation of the financial statements. It mandates the need of disclosing vital information on the financial
statements. Debts along with the payments for expenses are considered t be essential factors, which are to be
included in the financial statements (Watts & Zimmerman, 1990; Locus RAGS, 2014).
Normative theory of accounting states the need of developing a conceptual framework that for getting insights
about the manner in which entries is to be included with the company’s financial statements. The normative
theory with respect to accounting focuses on describing the need for changes, which are evitable during the
preparation of financial statements. For instance, changes in the external environment often make it necessary to
bring about alterations in the accounting policies that are followed by an organization. This calls for developing a
new conceptual framework (Locus RAGS, 2014). Another form of accounting is the critical method that looks at
the method of for preparing the organization’s financial statements in a different way. The primary argument of
the critical theorists with respect to accounting is mostly related to reflecting key areas of improvements that are
needed for bringing about changes in the organizational performance. Unlike, positive or normative theory of
accounting, critical theorists does not directly focus on the logic behind the use of different methods of
accounting. It reflects the need for preparing the financial statements by considering the political and economic
situations that prevails in the market (Haslam & Sikka, 2016).
Pertaining to Amazon, it is clearly evitable that critical accounting theory is practiced by the accountants of the
organization. It is because the case study repeatedly mentions about the fact that the share prices of the
organization had been decreased significantly and continuously in the year 2014. It infers that apart from
mentioning the daily expenditures and revenues, the accountants prepare the financial statements in an effective
manner, so that it can be easily understood by the stakeholders. The case study therefore highlights the
consideration for return, which is available to the stakeholders after attaining profit. Most of the accounting in

case of Amazon is done by considering the present information. For instance, calculation of inventory is done at
the market price and there is also a need to consider the features of taxation (Schaefer, 2014; Stock Analysis,
2017).
References:
Garg, M. C. (n.d.). Financial accounting: Meaning, nature and role of accounting. DDEE, 1-662.
Haslam, J., & Sikka, P. (2016). Pioneers of critical accounting: a celebration of the life of Tony Lowe. USA: Springer.
Locus RAGS. (2014). Approaches to accounting theories. Upload, 1-15.
Stock Analysis. (2017). Amazon.com Inc. (AMZN). Retrieved September 25, 2017, from https://www.stock-
analysis-on.net/NASDAQ/Company/Amazoncom-Inc/Analysis/Inventory
Watts, R. L. & Zimmerman, J. L. (1990). Positive accounting theory. The Accounting Review, 131-156.