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.
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.
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.
Heuristics helps in maintaining the flexibility in decision making and can be very helpful to the investors while important decisions regarding investing their money in particular bonds. It helps the investors of the company while they have to manage large amount of data. The investors in case of Amazon can make use of the thumb rules that are available to them to take effective decisions like trial and error, intelligent guess work, past formulas, use of historical data to make an analysis etc. These methods might help the investors in taking important decisions by breaking down complex data into simpler terms so that they can be analysed effectively. One of the most common type of heuristics is where the investors tries to analyse the stocks on the basis of the past performances , they do not go into in depth analysis where they analyse all the details about the stock and take decision on the basis of the same. It often may lead to errors because every time the situation is not same as the past situation (Minnis & Sutherland, 2017).
One more alternative of heuristics is Representative Heuristics. In case of these the investors use shortcuts to make analysis on the basis of the past judgements this often leads to a lot of errors. Other few types of heuristics include Availability biasness where the investors choose those stocks that are easily available. Familiarity Heuristic in which the investors chooses those stocks with which they are more familiar with, in this the investors chooses not to take any risks and take decision accordingly. The investors in case of Amazon can use these techniques that can help them in taking important decisions regarding the company on the basis of the past performances and the past analysis that has been done for the company. This is not very favourable as it might lead to a lot of errors and risks for the investors because the given situations are not identical.
Heuristics is the procedure with the assistance of which the investors helps in determining the things for any of the company by utilizing the strategy trial and error approach and it is seen that there are certain errors that are engaged in this procedure. They do not look to invest their energy in examining and assessing the data that enhances fast and quick answers and in the decision making process. It additionally deals with the enhancement of the performance for developing by exploiting of practical efforts and experience for answering the questions.
The life of the investors and the one who undertakes decisions has turned into an inescapable process in the financial market as the information is distributed quicker in such situation. The motivation behind why the market acts sometimes in an irrational manner as opposed to market that is informed. Heuristic process of decision-making is constructed for the explanation of the new data. There is few probability of error of the financial planning because of restricted availability of heuristics and information. The common unconsciousness bias of confirmation is consolidated and precisely caught in heuristics.
The different classifications of heuristics that is utilized by the investors in process of decision holding, buying and selling of the shares are given as follows:
Representativeness- When an investor looks to ascertain the likelihood that an entity A has belongs to class B and the likelihood that model B has created the set of the data for A. It manages contrasting of the data with intangible model and this is not inclusive of the much considered and leads that are useful for undertaking a decision.
Anchoring- Under this sort of heuristic, the investors makes the prediction of the initial number and altering the situations and the new data. In any case, there would be anchorage bias as they have the propensity of making deficient changes in accordance with that specific number of share prices.
Availability: When an investor depends on the data that is accessible readily and some instinctive associated with data that is more dynamic and more salient.
Impact heuristics- In such circumstance, the investors undertake decisions that are dependent on the instincts, gut feeling and intuition.
All the points discussed earlier are the intangible shortcuts utilized by the investors in purchasing the Amazon shares that will prompt mistakes during the method of finance related decision making.
From the above recorded different classifications of heuristics, it can be said that the investors can utilize these classes for holding and offering of the shares. An investor may purchase the shares of Amazon utilizing the influence heuristics in which the investors may purchase shares on the basis of their instincts and gut feelings that he shares prices may decline in the coming years. It is conceivable that the investors can sell of the shares of Amazon on accessibility of public data and they may hold shares by looking at the representativeness.
When utilizing representativeness bias, it is conceivable that a renowned organization may be priced highly and it is not fundamental that the venture would be beneficial and it depends whether the price is too high or is too low. There is intrinsic bias in the attitude because of some natural presence at the unconscious level. There is a diligence in utilizing bias and heuristics which is steady with a confirmation bias that is strong.
It is a well known fact that the critical theory of accounting is very different from the normal positive and normative theorists. As per the critical theory may not be helpful for the modern scenario and environment of the financials and may not be helpful to them. In case of Amazon the critical theory can be used to explain the prospective of the company on how they are using accounting and accountants for their own purpose. In case of Amazon as per the accounts of the company which are entirely correct as per the relevant standards and methods, the profit of the company is growing and the company is progressing.
However when we observe closely we see that the company has lost on a lot of underlying profits and the gross margin rate is also decreasing over the years. This is not a very good trait for the investors who are investing their money in the company for their own growth and development. Thus we see how the company is making use of the accounting policies for their own benefit and in that process they are neglecting the concern of the investors on the basic growth rate of the company that can be sufficient for the overall market demand (Burke & Clark, 2016).
Critical theories allude to the process of accounting that goes past questioning whether any specific method of accounting can be utilized. It helps in sustaining favoured condition of the firm in managing the resources while limiting their answers without capital. The process of accounting has a key function to play as explained by critical accounting scholars and a process of capitalist and they restrict the process of accounting. It brings in significant transformations in economy that is organized for unveiling the information with respect to the social accountabilities. It is looked down upon by the researchers that social process of the communities can be assisted by the incorporation of new framework of accounting and they should not exploit the accounting process for answering the issues.
Amazon utilises the innovative mechanisms for accounting by incorporating such framework into their own financial declaration, management and data. The financial performance of the of the one known as the investee is consolidated in the financial outcomes of the company by relying on the accounting process of the investee. The process of accounting for account-based compensations has been rectified. The financial declarations of Amazon are constructed in accordance to the General Accepted Accounting Principles.
The amount that has been reported for the assets and the liabilities are affected by the required projections and anticipations. The critical policies of accounting of an organization are characterized as the policies that are viewed as significant and imperative for the depiction of operations and financial outcomes of the organization by Securities Exchange Commission. The information that is accessible currently forms the basis of reasonability of presumptions, assessments and judgements. The new guidance of accounting is selected by Amazon for the reclassification of the deferred tax assets and deferred tax liabilities as assets that non-current in nature. Financial declarations of the company are not really affected by the incorporation of such policies of accounting.
Equity accounting technique is utilized as a part of equity ventures, as it does not have any power on investee, and they practice impressive impacts. An update of the accounting standard is issued by the management that has corrected direction on guidance on the declarations of the information in the documented financial data. The use of this technique for the process of accounting has helped companies and clients financial statement users in gaining knowledge about the amount, vulnerability, nature and timing of cash flow and incomes emerging from the contract of the customers.
Amazon has enhanced their accounting framework for recording of inventories and the basis of computation has transformed to bring down net realisable value or expenses from lower of the value of the market or the cost. The computation of the income tax has been corrected that requires the characterization of all the deferred tax liabilities and the assets as non-current on balance sheet that is consolidated.
The leases for accounting have been revised and as indicated by new guidance needs operating leases as liabilities and assets for over a year alongside recording in the consolidated balance sheet. From the above explanation, it can be concluded that Amazon has utilized updated and variant framework of accounting for their own intention and they have implemented the perspectives of the critical theories. Therefore, it can be said that accounting has been viewed in a different way with respect to the positive and normative theorists and this has been fundamental for the explanation of the accounting standards and framework used by Amazon.
References:
Burke, J. & Clark, C., 2016. The business case for integrated reporting: Insights from leading practitioners, regulators, and academics. Business Horizons, 59(3), pp. 273-283.
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