According to the International Financial Reporting Standards (IFRS), the objective of general financial reporting is to offer useful information that can be used to make and evaluate decisions such as allocation of resources and investment by the report users. Financial reporting help the users to objectively track and analyze the entity’s income (Dillard, 2012). Purposely, financial reports are meant to examine the usage of resources, establish the entity’s financial health, its performance, cash flow, and resource allocation and usage (Deegan, 2014). With this information, investors and the business managers are in a better position of making decisions on how best to manage the entity.
The information contained in the financial reports is useful in several ways to the business. For example, it is used to determine whether or not to offer credit sales to customers, whether or not to invest assets and whether or not to offer dividends to the shareholders among others. Investors also rely on the report when making investment decisions (Deegan, 2014). For existing investors, like those of Amazon, are interested in knowing how annual revenue is being reinvested into the business, the amount of dividend they are likely to earn from the previous year’s proceeds, how efficient is their capital being used and whether or not the entity still remains the better place to have their cash.
Financial reporting provides information on the cash flows of a given entity. The information comprises of the uncertainty and timing of such cash flows. Such information is vital in establishing the liquidity/ financial health of an entity i.e. whether or not it still operates as going concern (Deegan, 2014). In evaluating the cash flows at Amazon.com, the financial report should help the investors to answer the following questions; where is the company generating its money from? What is the future of the business? Is the company making profits or losses? The questions can only be answered by tracking the cash flow (Atrill & McLaney , Management Accounting for Decision Makers, 2015).
Investors can anticipate the business performance to expect in the future by monitoring the changes in the three financial items. The analysis will also reveal the ability of the business to meet its financial obligations. Lastly, such an analysis establishes the availability of resources to ensure future growth (Ezzamel & Heathfield, 2013).
The information revealed in the Amazon’s financial report addresses the cash flows. Therefore, the investors should concentrate on tracking the company’s cash flows. First, the financial report concentrates on the company’s profitability. Profit/ loss is obtained by deducting the cost incurred in generating revenue from the revenue generated. The Amazon’s profit has been highly affected by the ever-rising cost margin (Boje, 2008). Although the Company’ sales grew by 23% to $19.3 billion, the profit realized was unsatisfactory (Deegan, 2014). Profitability also has a direct impact on the price of shares. The higher the profit, the higher the competitiveness and the higher the share price. The report shows that the company shares have dropped in the market. Investors are shying away from placing their cash in the company (Jennins, 2004).
By tracking and analyzing the Amazon’s cash flows of their previous years, the investors will form a formidable decision whether or not to reward the growth strategies. The shareholders can also predict the likelihood of the company’s performance improving the future. Lastly, the management can use the cash flow analysis report to identify the weakness within the company’s operational strategy and come up with remedies to minimize the cost or maximise the profit margin (Riahi-Belkaoui, 2002).
Conservative accounting methods state that before claiming any company profit there is the need to verify all the associated losses and expenditures incurred during a financial year. The accounting method is not meant to manipulate the reporting of transactions, but it offers guidance when there is a need for verification when uncertainty arises. Revenue should be reported in the same financial period as the associated expenses. In short, the conservatism accounting principles states that assets and liabilities are generally understated while expenses and liabilities are overstated. Therefore, conservatism accounting lower the net come as well as the future financial benefits of shareholders. The objective is to ensure the continuity of a company during the financial crisis when many expenses cannot be met. Such benefits, expenses, and liabilities are carried forward to the future periods (Deegan C. M., 2014).
Assume that Amazon’s accountant is facing two alternatives in recording a transaction inventory. The cost of the inventory is $ 500,000. However, the value of the inventory in the marketplace has dropped and it can only be sold at $450,000. The company would incur an additional cost of $10,000 for packaging and shipment. The accounting would be confused on whether to record the inventory at its historical value ($500,000) or at the net realizable value (NRV) of $ 440,000). NRV is equal $450,000 minus $10,000. Likewise, the accountant is in a dilemma on whether to immediately record the $60,000 or ignore it until the inventory is sold.
According to the Conservative accounting principle, the inventory should be reported at its NRV of $440,000 in the balance sheet and the loss of $ 60,000 reported immediately in the income statement (Atrill & McLaney, 2015).
There is a positive correlation between conservatism and a company’s value during the crisis. Conservatism accounting method provides efficient and effective mechanisms used in mitigating control agency issues and information risk. Likewise, shareholders are likely to benefit a lot from the application of conservative accounting.
First, during the systematic crisis, companies are likely to experience financial distress exposing them to agency problems. At such a times, managers are likely to aggressively manipulate earnings for their personal benefits hence imposing more risks to the shareholders. However, conservatism accounting will ensure verification which offers transparent and reliable accounting information to the external shareholders. Second, Conservatism accounting protects a company’s stock from adverse price decline during the crisis
period. Third, conservatism has an impact on the company value. It reduces the cost of financing debts, increases investment efficiency, control firm risks, improves the value of cash holding, and protect the stock price from crash risk in the market. Conservatism principle would protect the firm from further loss of value during the current crisis (Deegan C. M., 2014).
Therefore, Conservative accounting method would benefit both Bezos and the shareholders. It will provide a quality, transparent and reliable accounting information to the stakeholders. Conversely, the price of the company’s stock in the market would be protected against further downfall hence enhancing the investors’ confidence. Moreover, Amazon’s value in the market would be protected against extreme loss (Boje, 2008).
In the stock/ financial market, Capital Market Research (CMR), is used to determine the company earnings and stock prices that best fit shareholders. CMR advocates on studying a company’s profile, size and the stock market with respect to its performance in the market. Gathering and analysis of a past profitability and performance data and popularity of a company should be considered before making a decision on whether to sell, buy or hold the current stock. Considering that investment in a company’s share is a long-term activity, CMR helps in making decisions that increase profitability while minimizing risks involved (Deegan C. M., 2014).
Some of the company factors considered when conducting CMR analysis are;
Based on the earnings report released by Amazon, shareholders/ investors had mixed reactions. While some felt that their share was secured others were contemplating that the best option would be selling out their shares. The earnings report showed unimpressive performance during the period. Amazon missed two estimates in the last four quarterly financial reports that were released although the stock prices remain strong in the industry. The stock contributed to 44.6% of the total earnings which was 2. 69% higher than the industry’s gain (Dillard, 2012).
The performance was contributed by several factors. There was an increased performance in the AWS, North America, and International segments. The North America segment attributed to 58% of the total sales representing 6.8% increment. The international segment accounted for 325 of the total sales recording an increase of 7.8%. Lastly, the AWS segment accounted for 10%.However, heavy investments contributed to a slim profit margin. Amazon invested heavily in building fulfillment centers which contributed to the increased level of operating expenses (Ezzamel & Heathfield, 2013). The increases expenditure on movies and TV shows also increased the operating expenses. Lastly, the expansion in the India market and Amazon Web Services also escalated the level of company’s expenses.
Bezos has invested heavily on the retail, AWS, and IoT with an aim of increasing the market share. It is difficult for the competitors to beat Amazon in the market. With reasonable prices, a variety of choices and convenience, Amazon is a Corporation for the present and the future. The heavy investment is likely to contribute to higher profitability in the future. With the replication of its
domestic success in the international market, it is anticipated that the investors will witness more growth in the coming years. Currently, the international market contributes only a third of the total revenue with an insignificant contribution to the net profit.
The mixed reaction of customers is based on the previous performance and the expected future performance based on the current investments. Some customers are ready to sell their shares based on the current crisis. Others believe that Amazon is likely to increase its growth in the future and they want to hold on their current shares. However, no one is willing to buy additional shares with Amazon (Jennins, 2004).
Human decisions are based on intuition, nature, habits, emotional or cognitive biases hidden in one’s mind. Behaviour finance explores how psychology influence financial markets and financial decisions. Investment decisions are greatly impacted by heuristic biases. Various changes in financial setting such as varying economic situations and changes in the market have a gross effect on the thinking and decisions made by investors.
Naturally, investors fear to lose their invested capital and readily react to market changes impulsively. They are likely to change their long-term investment decision after listening to the opinions made by financial experts. Likewise, based on the past performance of any organization/ market, investors tend to doubt the investment decisions they previously made. Traditionally, researchers believed that investment decisions were based on in-depth knowledge of the market possessed by the investors and well-analyzed forecasts based on past performances. However, studies have shown that psychological state of investors has a major influence on investment decisions (Dillard, 2012).
Irrational decisions based on short-term market changes such as losses leads investors to make inefficient investments. The heuristic approach reduces the willingness of the people to invest. Heuristic states that people rely on little information in making general decisions. Heuristic helps people to make decisions in a shorter time than the time it would take to exhaustively analysis and compute formidable decisions. Conversely, the approach undermines the ability to scrutinize, retrieve and store information in their memory.
The Amazon Incorporation facing financial crisis. The organization is witnessing a diminishing profit margin as shown in its financial reports. The heuristic approach can be used by new investors to decide whether or not buy Amazon shares. Likewise, old investors can apply the same concept in deciding whether or not to hold or sell their current shares (Deegan C. M., 2014).
According to the behaviour finance, human beings fear to lose their money. After obtaining the poor profitability performance by Amazon, such investors are likely to sell their current share so as to get their initial cash outlay paid on the shares.
However, Some investors might take some time to analyze the market performance in the new future. Such investors tend to apply rational thinking instead of heuristic approach. They tend to believe that the current shortcomings are short lived. However, this group of investors are cautious and would not be willing to invest more money to buy the shares. Hence they would rather hold their current number of shares (Jennins, 2004).
The last group of investors is not influenced by a heuristic approach. The investors invest more time to understand the current changes in the market as well as their impact in the long run. If the future projections are favourable, then the investors will buy more shares.
The Amazon Inc. has invested heavily in its infrastructure and online market which has led to the small profit margin. It is believed that investment would improve financial health and growth in the long run. Either way, investors rely on the current crisis would sell their sales. The irrational one would hold their sales for a considerable time. While the well-informed ones would buy more shares (Ezzamel & Heathfield, 2013).
Accounting has become part and parcel in the current society. Accountant, auditors are relied on by companies, government and institutions to offer credible, influential and legitimate advice. Organizational such as Amazon depend on accounting practitioners in making decisions on contracting, mergers and acquisitions, accountability, investment, performance appraisal, risk management and governance. Accounting information also impacts the pricing of financial instruments and shares and cost determination for the services and goods. Accounting also guides Amazon in determining how and where goods are produced as well as the distribution channels. The above reasons can be used to understand why accounting strongly connected to economic rationalization and globalization. Therefore, the accounting value is based on the degree of its influence on decision-making by companies and investors (Dillard, 2012).
Critical theory is defined as an approach that is used to destabilize and challenge the established knowledge. In accounting, there are several principles, rules, and standards that are used when recording transactions. However, organizations tend to choose the standards that favour them. For example, a company might choose GAAP principles and forgo the IFRS regulations.
In the case of Amazon, the company might choose to use the conservative accounting approach. As discussed earlier, Conservatism accounting method provides efficient and effective mechanisms used in mitigating control agency issues and financial risk. Which is an advantage to the company? Conservatism accounting ensures verification of items which offer transparent and reliable accounting information. Conservatism accounting also safeguards a company’s stock from adverse price during the crisis. Conversely, conservatism reduces the cost of financing debts, increase investment efficiency (Deegan C. M., 2014). Conservatism principle would protect the firm from further loss of value during the crisis.
Likewise, Conservatism accounting states that liabilities and expenses should be overstated while assets and liabilities are understated. The approach ensures that reported returns and profits are lower than the actual values. By recording small profit, the company can prevent the demands for higher dividend payments from the shareholders until the financial situation stabilizes.
By applying conservative accounting method, benefit the company because it provides a quality, transparent and reliable accounting information. The price of the company’s share would be protected against further decline thus promoting the investors’ confidence. As stipulated by the critical theory, Amazon would use the conservatism accounting to protect its financial performance in the market against criticism (Ezzamel & Heathfield, 2013).
Moreover, the company might choose to record goods on transit as sales. According to the IFRS regulations, goods on transit should be recorded as inventory until actual sales have been reported by the distributors. However, Amazon can report such items as sales so as to increase its profit margin. With inflated profit, Amazon will be able to restore the investors, creditors and suppliers confidence. The company will also protect itself against criticism from different stakeholders (Ezzamel & Heathfield, 2013). Considering that trade unions rely on financial reports published by the company to demand salary increment. Accountants at Amazon can choose to deflate their profitability so as to discourage new demands from trade unions. It should be noted that such practices are against the accounting principles (Jennins, 2004). However, as stipulated in the critical theory, the company can choose to ignore the norms and established principles for its advantage.
References:
Deegan, C. M. (2014). Financial Accounting Theory (4 ed.). North Ryde, NSW: McGraw Hill Education (Australia) Pty Ltd.
Dillard, J. F. (2012). Accounting as a Critical Social Science. Accounting, Auditing & Accountability Journal.
Ezzamel, M., & Heathfield, D. (2013). Perspectives on Financial Control: Essays in memory of Kenneth Hilton. New York: Springer.
Jennins, A. (2004). Financial Accounting. New York: Thomson Learning.
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