Amazon's Accounting Practices and GAAP

This assignment delves into Amazon's accounting practices, focusing on their compliance with Generally Accepted Accounting Principles (GAAP). It examines how Amazon recognizes revenue from sales and services, values its inventory using the FIFO method, and accounts for stock-based compensation. The analysis also considers Amazon's approach to tax provisions and the use of judgment in financial reporting.

ACCT20074 Final Assignment
Term 2, 2017
Student ID:………………………………. Student name……………………………………………………..
Marker’s overall comments: The markers may include any final
comments here.
Overall Mark (Total) out of 50: 0

Question 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.
References:
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.
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
Question 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.
References:

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.
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
Question 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).
References
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.
Marker’s Comments: The marker will provide feedback here. Mark (10):

0
Question 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.
References:
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.
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
Question 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.
References:
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.
Marker’s Comments: The marker will provide feedback here. Mark (10):