Amazon's Financial Reporting Practices

This assignment delves into the intricacies of Amazon's financial reporting practices. It requires a critical analysis of various aspects, such as revenue recognition methods for multifaceted deliverables, inventory valuation using the FIFO method and lower of cost/market value, and stock-oriented remuneration through restricted stock units. The analysis should explore how Amazon's distinctive business model influences these accounting choices and their implications.

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

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
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.
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.
References:
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.
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: Use Capital Markets Research (CMR) to explain the reaction of Amazon’s shareholders to Amazon’s earnings
announcement.
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.
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).
References
Kothari, S. P. (2001). Capital markets research in accounting. Journal of accounting and economics, 31(1), 105-231.
Bodie, Z. (2013). Investments. McGraw-Hill.
James, J. A. (2015). Money and capital markets in postbellum America. Princeton University Press.
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
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.
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).
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.
References:

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.
Wambaugh, J. F., Wang, A., Dionisio, K. L., Frame, A., Egeghy, P., Judson, R., & Setzer, R. W. (2014). High throughput heuristics
for prioritizing human exposure to environmental chemicals. Environmental science & technology, 48(21), 12760-12767.
Hauser, J. R. (2014). Consideration-set heuristics. Journal of Business Research, 67(8), 1688-1699.
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
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.
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.
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:
Brasel, K., Doxey, M. M., Grenier, J. H., & 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.
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