Contemporary Accounting Final Assignment - Term 2, 2017

This document presents a comprehensive solution to a final assignment in contemporary accounting, focusing on an Amazon case study. The assignment addresses key objectives of financial reporting, analyzing which objectives are most relevant to Amazon's financial statements. It delves into the preferences of Jeff Bezos and Amazon's shareholders regarding conservative accounting methods like historical cost, exploring the implications of these methods on revenue recognition and profit reporting. The solution also includes detailed analysis of the case study, incorporating relevant references to support the arguments and analysis. The assignment covers a variety of accounting concepts, including financial reporting objectives, accounting conservatism, and the impact of accounting choices on stakeholder interests. The provided solution is a valuable resource for students studying accounting, offering insights into real-world financial reporting challenges.

Contemporary Accounting Final Assignment
Term 2, 2017
MAJOR ASSIGNMENT
Marks Worth: 50
Student ID:………………………………. Student name……………………………………………………..

Major assignment instructions
This assignment submission link provides a download link for the answer document you must use to answer the five questions making
up this assignment. This assignment must be submitted by 11:45pm on Friday of Week 12. Therefore, to successfully complete this
assessment, you must:
1. Download the attached answer document.
2. Use this document to answer the five questions that are provided on the answer document.
3. Submit the completed answer document by 11:45pm on Friday of Week 12.
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Amazon case study: Amazon Under Fire
The following is a reproduction, with some paraphrasing, of a news article that recently appeared on Forbes.com. It highlights the
difficulty corporations face in getting shareholders to reward their growth strategies. You should be aware, as hinted by this article, that
although Amazon reports staggering revenue figures, its high cost margins mean that profits, when they are achieved, are relatively
small.
Amazon under fire: What happens when sales growth isn’t enough?
The headline figure in Amazon.com's 2014 second-quarter earnings report looked great — a 23% jump in sales from the prior year, to
$19.3 billion — but the underlying figures for the unprofitable online retailer brought out the pessimists on Wall Street.
Amazon shares plummeted almost 11%, knocking $3.5 billion off the fortune of founder and CEO Jeff Bezos (now at $29.3 billion), after it
lost 27 cents per share, much worse than the consensus estimate of 15 cents. The company’s perpetual lack of interest in turning a
consistent profit and declining gross margins — which could fall further given the company’s ambitious investing in new areas — sparked
concern among the analysts that watch the company.
“[Investors] are less patient than before regarding ongoing margin pressure,” wrote Canaccord’s Michael Graham, who rates the stock a
hold and dropped his price target to $340 after Thursday’s results.

UBS analyst Eric Sheridan argues that Amazon can keep growing revenue at a 20% annual clip, but that it might not be enough for the
market. He thinks investors “will struggle to buy the stock until more gross profit drops to operating income.”
...
Raymond James’ Aaron Kessler dropped his rating to market perform despite remaining bullish on Amazon’s long-term prospects, mostly
because he expects shares to be stuck in a trading range “given continued high levels of investment combined with slowing unit growth
(especially international growth).”
More of the same came from Barclays Capital analyst Paul Vogel. “Amazon has always operated at razor thin margins,” he wrote, “but
rapid revenue growth and optimism on long-term margin upside has been able to sustain the stock.” That’s certainly true, as shares have
returned almost 700% over the last decade. But Vogel worries that “[w]ith revenue growth decelerating and margins moving in the wrong
direction, the stock could be in for a bumpy ride.”
...
Goldman Sachs’ Heath Terry offered a similar sentiment. Terry noted that the pressure on Amazon margins are “clearly testing investor
patience,” but argued that Bezos’ focus on constant investments in areas like grocery deliveries will have a productive endpoint. “We
believe, as they have historically, these investments will generate incrementally higher levels of revenue and operating cash flow growth,
ultimately driving share price outperformance.”
At the moment though, confidence that Bezos knows best isn’t running at an all-time high. With Friday morning’s 10.7% loss to $320.42,
shares of Amazon are down nearly 20% for the year (Schaefer 2014).
References
Schaefer, S 2014, ‘Amazon Under Fire: What Happens When Sales Growth Isn't Enough?’, forbes.com, accessed August 1, 2014,
from http://www.forbes.com/sites/steveschaefer/2014/07/25/amazon-under-fire-what-happens-when-sales-growth-isnt-enough/.
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 purpose of general purpose reporting framework is to prepare the financial statements in such a manner that it shows the true
and fair view of the company. The general purpose reporting framework has been developed to solve the issues that the company faces
while preparing these statements and also the problems that are users faces while analysing them for taking important decisions. It is
important for the companies to follow these standards and make sure that in case of any deviations, they need to provide proper
explanation for the same in disclosures that they give for the company. It main objective to make this process of account preparation
free from all kind of errors and mistakes. In case of Amazon also the main objective of the company is to provide proper information to
the users through their financial statements so that they can take proper decision with regard to the company and its various policies.
The company is considering making new investments and it is important that the companies must make proper disclosure about the
same in their annual reports. The company must follow all the accounting standards and accounting policies that would help them
making all the disclosures accurately and very precisely (Kew & Stredwick, 2017). It is seen that on the basis of the same the company
needs to follow the standard rules and regulations for the preparation of their financial statements and it is important to make sure that
they are free from all kind of errors. The auditor must also check the same and on the basis of the same give a audit report that is in
favour of the company and its accounts. It is helpful for the investors and helps them in taking major decisions with regard to the
company and its accounts. This is the main purpose of the general purpose reporting framework that they must satisfy the needs of the
end users.
The general purpose financial declaration is a method for conveying reliable and precise data to clients about revealing an element. The
documenting entities are empowered to release their responsibility by giving instruments to their governing bodies and management. It
helps in releasing the obligations of revealing elements by arching both at macro and the micro-economic degree. Another goal of
general intention of financial reporting is to serve the necessities of the shareholders of documenting the entities like the probable
investors, lenders, creditors with applicable financial data that would help them in the process of making decisions. It gives stage to
surveying the prospects of elements for their future net cash flow and whether the administering management are adequately and

proficiently supervised.
The general intention of financial documentation is coordinated principally taken into account for the investors, creditors and lenders
and their goal is to give important financial data. The financial data about the documenting elements, for instance any claim against
them and any economic assets are given through such reporting models. The impact in the exchange and any impact of transformations
in claims and economic resources are given out. Helpful information are given through such data that help the investors in the process
of decision making.
From the assessment of the case study of Amazon, it was explained that incorporable aims according to the general intention elements
are associated to their financial performance.
The current marginal pressure of Amazon is influencing the investors. The investors try to get the data about the company whether the
positive cash flow are generated during the functions of the business and functioning profitably. This is so since decisions of the
investors about anticipated cash flow is related with the investors, business vulnerabilities and entities. In this manner, Amazon is
required to implement the general purpose objective with an aim of disclosing precise financial data to the investors. Financial
statements of Amazon should consolidate applicable money related data and actual materials are to be perused with the financial
reporting that are to be conveyed to the investors of the firm.

References:
Kew, J. & Stredwick, J., 2017. Business Environment: Managing in a Strategic Context. second ed. London: Chartered Institute of Personnel and Development.
Marker’s Comments: The marker will provide feedback here. Mark (10):
0
Exceeds Expectations
(High Distinction) 85-100%
Exceeds Expectations
(Distinction) 75 - 84%
Meets Expectations
(Credit) 65 – 74%
Meets Expectations
(Pass) 50 – 64%
Below Expectations
(Fail) below 50%
Demonstrates a balanced and very
high level of detailed knowledge of
core concepts by providing a very
high level of analysis. Utilises
current, appropriate and credible
sources.
Demonstrates a balanced and high
level of knowledge of core
concepts by providing a high level
of analysis. Utilises mostly current,
appropriate and credible sources.
Demonstrates a good level of
knowledge of some of the core
concepts by providing some level
of analysis. Utilises some current,
appropriate and credible sources.
Demonstrates limited knowledge of
core concepts by providing a
limited level of analysis. Utilises
few current, appropriate and
credible sources.
Demonstrates little, if any,
knowledge of the core concepts
with extremely limited, if any,
analysis. Utilises little, if any,
current, appropriate and credible
sources.
Quality of writing at a very high
standard. Paragraphs are
coherently connected to each
other. Correct grammar, spelling
and punctuation.
Quality of writing is of a high
standard. Paragraphs are mostly
well structured. Few grammar,
spelling and punctuation mistakes.
Quality of writing is of a good
standard. Few grammar, spelling
and punctuation mistakes.
Some problems with sentence
structure and presentation
Frequent grammar, punctuation
and spelling mistakes. Use of
inappropriate language.
Quality of writing is at a very poor
standard so barely
understandable. Many spelling
mistakes. Little or no evidence of
proof reading.
The assessment presents a
detailed and focused summary of
the ideas presented; drawing clear
and well thought-out conclusions.
The assessment presents a fairly
detailed and focused summary of
the ideas presented; drawing fairly
clear and well thought-out
conclusions.
The assessment presents a
somewhat detailed and focused
summary of the ideas presented;
providing some evidence of
conclusions.
The assessment provides limited
detail with no clear summary of the
ideas presented; drawing limited
conclusions.
The assessment fails to provide
any clear evidence of the ideas
presented; drawing no clear
conclusions.

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.
Conservative accounting methods such as historical cost are such techniques in which all the losses must be recognised as and when
discovered and all the expenditures must be recognised must be incurred. Accounting conservatism theory helps in making decisions
when there are more than two alternatives available for making the effective decisions in regard to financial reporting and analysis.
However when it comes to revenue recognition the policies are more stringent. The revenues must be recognised in the same period as
the expenses. All the information must be realisable in case of the transaction so that it is recognisable. However when there is no cash
or no asset in exchange then the revenue is not recorded. However accounting conservatism may lead to revenue shifting (Maynard,
2017). If the transactions are not meeting the requirement criteria then they will not be recorded and that might lead to present revenue
be recognised in the future period. Thus Jeff Bezos being the part of the management of the company may prefer these conservative
methods that might help them in effective revenue recognition, however in case of shareholders they might not prefer this method
because this might lead to revenue recognition and thus that might lead to reduction in their profits. However in case of management of
the company they will prefer this method as it will help in effective disclosure of income and expenses in sync with each other. Thus in
comparison of both the parties, the shareholders might not prefer this kind of accounting method but it might be helpful to the
management of the company.
A difficult issue exists with the remuneration of CEP or reward they receive and in majority of firms; the bonus the CEO receives is
free of the share performance. If the prediction of the CEO accepting bonus in light of the performance of the share price and
documented profit has been authentic, for this situation the shareholders of the company would be profited, as they would have the
capacity to gage the real performance of progressing concern and surveying the financial documentation. The shareholders of the firm

gage the financial performance by utilizing various parameters, for example, return on equity, income, development and escalation in
the share price.
Utilizing historical cost would be points of interest from the perspective of CEO; conversely it would not portray clear idea of the
situation of the organization. The investors would not have the capacity to assess the present situation or the present circumstance of
the company in light of the fact that the prediction of the economy turns out to be less substantial and they hold the purchasing power
consistent. Thus, there is a probability of making adjustments in the revenue figures and in this way the operational ability. The
utilization of the traditional strategy has a few advantages and still they are being utilized for the construction of a few assets, like the
inventories.
Actual information of the economy, for example, variance in the rate of exchange, general transformations in the level of price and
particular changes in level of price is not consolidated in measuring the performance of the company. The CEO of the firm would want
to embrace traditionalist techniques for accounting for example, historical cost the real amount of bonus earned by them would not be
assessed by the investors. The CEO would earn high measure of bonus by relying on current market value that would be reflected
really in the financial documentation. Nonetheless, in such circumstance, there can be any modifications in profitability scenario that
may be utilized by the CEO to claim the self and individual intrigue. If the historical cost forms the distribution basis of unadjusted
revenue in case of rising prices, at that point a substance would circulate a piece of their capital in real term.
The shareholders would not incline towards historical accounting process as they do not have the capacity to get precise picture of
financial situations as the traditional strategy would make contrast between the historical costs and current asset value. Utilizing this
strategy would exaggerate price in occasions of increasing prices and there will be disintegration of operating profits due to distribution
of profit. Operating profits in present year is misshaped by holdings of the gain in the past period. Alterations incorporated at the
historical costs do not roll out any improvements in money related asset value due to transformations in the rate of inflation. Hence,
investors would incline toward utilizing techniques for ascertaining bonus in view of the performance of the share prices and the CEO

would want to utilize traditional approaches, like the historical costs.
References:
Maynard, J., 2017. Financial accounting reporting and analysis. second ed. United Kingdom: Oxford University Press
Marker’s Comments: The marker will provide feedback here. Mark (10):
0

Exceeds Expectations
(High Distinction) 85-100%
Exceeds Expectations
(Distinction) 75 - 84%
Meets Expectations
(Credit) 65 – 74%
Meets Expectations
(Pass) 50 – 64%
Below Expectations
(Fail) below 50%
Demonstrates a balanced and very
high level of detailed knowledge of
core concepts by providing a very
high level of analysis. Utilises
current, appropriate and credible
sources.
Demonstrates a balanced and high
level of knowledge of core
concepts by providing a high level
of analysis. Utilises mostly current,
appropriate and credible sources.
Demonstrates a good level of
knowledge of some of the core
concepts by providing some level
of analysis. Utilises some current,
appropriate and credible sources.
Demonstrates limited knowledge of
core concepts by providing a
limited level of analysis. Utilises
few current, appropriate and
credible sources.
Demonstrates little, if any,
knowledge of the core concepts
with extremely limited, if any,
analysis. Utilises little, if any,
current, appropriate and credible
sources.
Quality of writing at a very high
standard. Paragraphs are
coherently connected to each
other. Correct grammar, spelling
and punctuation.
Quality of writing is of a high
standard. Paragraphs are mostly
well structured. Few grammar,
spelling and punctuation mistakes.
Quality of writing is of a good
standard. Few grammar, spelling
and punctuation mistakes.
Some problems with sentence
structure and presentation
Frequent grammar, punctuation
and spelling mistakes. Use of
inappropriate language.
Quality of writing is at a very poor
standard so barely
understandable. Many spelling
mistakes. Little or no evidence of
proof reading.
The assessment presents a
detailed and focused summary of
the ideas presented; drawing clear
and well thought-out conclusions.
The assessment presents a fairly
detailed and focused summary of
the ideas presented; drawing fairly
clear and well thought-out
conclusions.
The assessment presents a
somewhat detailed and focused
summary of the ideas presented;
providing some evidence of
conclusions.
The assessment provides limited
detail with no clear summary of the
ideas presented; drawing limited
conclusions.
The assessment fails to provide
any clear evidence of the ideas
presented; drawing no clear
conclusions.

Question 3: Use Capital Markets Research (CMR) to explain the reaction of Amazon’s shareholders to Amazon’s
earnings announcement.
Capital Market Research Theory helps in analysing the relationship between the financial statements of the company and the various
capital markets of the company. It explains how the prices of the stocks of the company are affected as soon as any changes in the
financial statements of the company occur. As per the recent news that the company was earning huge profit but that was not supported
by the underlying figures of the unprofitable online retailers, this sparked some sense of competition among the investors of the
company (Burke & Clark, 2016). Since the investors saw that the management of the company was not applying proper care towards
the falling gross profits of the company and the declining gross margins, the investors became sceptic about investing in the company.
Thus if we explain the same behaviour with the help of the Capital research market theory we see that how the information in the
financial statements of the company affected the overall approach of the investors of the company for the company and its market
value and brand value(Alexander, 2016). It has been quoted that the investors were panicking about their profit margins given the
current scenario of the company and its financials. It seen that as shown as the results about the financial reports of the company were
declared the behaviour of the stock holder changed, just we see in case of the Canaccord’s Michael Graham who dropped the price
target of the stock to $340 .It is said that even though the revenue of the company was growing at a percent of more than 20 percent
annually that will not be sufficient enough to satisfy the needs of the market people.
There exists a connection between expected future profit and prices of shares and hence a company would have increased anticipated
price of shares if it has increased future income undertaking transformations with regards to the risk. While foreseeing the future
income of the company, an investor thinks about all the market overview, press releases, statistics and reports of the experts. The only
new data that will prompt to the modification in future income would be that the share prices would replicate all the data that are
known publicly under semi solid type of productive market. This can be clarified with the assistance of a scenario, assuming that a
CMR organization has shareholders who have anticipated that they would get a profit of $ 10.5 million and real earnings of $ 11

million has been reported. At that point share price response will be a segment of the unfrequented income of the company. In the
process of accounting, it has been expected in the capital marketing investigations that the equity market is semi solid form and
effective. It is understood by the method that the share prices of the firms discloses the appropriateness and quickly reveals all the
freely accessible data and the financial declarations alongside data documented in the financial reports. Another type of proficiency in
the capital market analysis is the feeble frame of effectiveness and the strong form of effectiveness. The most significant capital
marketing survey in the process of accounting is the semi solid kind of effectiveness since it replicates the data that are openly
accessible. Nonetheless, this form is dependent on assumption that there is a swift reaction of part of market to the freely accessible
data.
With respect to the sustainable pressure in the market, shareholders of Amazon are insignificantly tolerant that one of shareholders
appraised the stock as hold and the price target declined to $ 340 after the declaration of the result on Thursday. It is seen that until the
gross profit of the firm declined to the operating income and the shareholders will battle to purchase the stock. This sort of response of
the shareholders of Amazon towards declaration of income can be understood as semi solid type of proficiency as it associates with
utilizing data that are freely accessible. In this scenario, the market is reacting fast towards the information that is accessible freely
accessible. The cost of securities of Amazon is rapidly changing in accordance with the data that has been received by investors and
subsequently it terminates the fundamental and technical examination for accomplishment increased return. For accomplishing higher
rate of return, investors are required to have of higher threats of rate of return. The market is transforming in accordance with
investment costs in light of the accessible data. The share prices of Amazon would fall additionally because of reducing gross profit
and steady revenue due to the company’s absence of never-ending interest. The company looks to expand their income at the rate of
20% every year except that it may not be sufficient for the market that may be battling for investors to purchase the stocks.