Objectives Of Financial Reporting And Conservative Accounting Methods For Amazon

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.

To Show a Business Financial Position

The financial position of a business is determined by the aspects of the company that the business actually controls, e.g. the resources, financial structure, adaption capacity and the solvency status. Financial position information disclosure involves identifying and evaluating the assets that the company controls. The information can be used in making and evaluating the decisions made concerning resource allocation and usage (Kabalski, 2009). Additionally, by including the information on business economic resources and its claims against those resources, the report is used in predicting potential changes and challenges (relating to economy) that may hinder the business from achieving its goals and objectives.

The performance of a business is measured by looking at the revenues earned during the reporting period. The general purpose financial reporting is to disclose any information on any revenue/income received by the business as well as checking out the expenses that the business incurs to receive the specified revenue. The report is also used to evaluate the business asset usage, liability and equity position (Kabalski, 2009). The performance information evaluate the management performance, business’s ability to generate cash and risks associated with business performance and their effects to its operations. All of this information on business aspects can be used to determine if the business has good or poor performance levels.

This relates with the ability of a business to use the available funds to generate more money through investing operations and other business operations. Therefore, it relies entirely on business cash flow control. By disclosing the information on how a business has financed certain specific operations and investment opportunities will be indicating the business’s technique and idea of cash flow control (Sutton et al, 2015). Also, the report shows the business transactions that relate to customer payments, supplier payments, debt payments among other operations that involve cash inflow or cash outflow. Therefore, this objective ill help the business determine the management performance and the accountability levels of the management team towards resources and finances.

From all of the above objectives, the objective on determining business performance is the one suitable for Amazon Company. The company is said to be an international business operating almost all parts of the world. This means that its performance should be higher and better than the smaller countries operating in just on country. The information in the case study indicates that the company’s world-wide performance is decreasing with time because of its desire to invest in more project than they can afford. When Amazon concentrates on this objective, it will be able to realize its value on equity which includes the business shares value, profit levels, asset and resource allocation, its revenue levels as well as the expense rates. Through performance objective concentration, the company will be able to compare between its revenue and expense levels which are the basic indication of business performance. The report objective will help the company focus entirely on achieving and improving its performance.

References

Kabalski, P. (2009). Comments on the Objective of Financial Reporting in the Proposed New Conceptual Framework. Eurasian Journal of Business and Economics, 2(4), 95-111.

Sutton, D. B., Cordery, C. J., & Zijl, T. (2015). The purpose of financial reporting: The case for coherence in the conceptual framework and standards. Abacus, 51(1), 116-141.

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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 method is used to recognize operational expenses and liabilities as soon as they are termed uncertain and assets and revenues as soon as the business becomes certain of receiving them. This means that every operation that involves any of these four aspects, must have high degree of verification and assurance of them happening (Ruch et al, 2014). For instance, when the financial accountant predicts a certain loss, even when the probabilities are high, the loss should be recorded immediately. Therefore, in this methods, when there is uncertainty about incurring a loss, the loss should be recorded and if there is uncertainty in receiving a profit, the profit recording should not be recorded (Ruch et al, 2015). Its rules are used in guiding the accountants especially when deciding between two financial alternatives which means that they help an accounting in making decision when the probabilities of him/her being bias are half. The principle of governing conservative method states that the businesses should actually understate the assets and revenue values rather than overstate them to ensure that they “play safe” in the estimation processes. Conservative theory guides a business into correctly recording and documenting the right values in a financial report.

The impact of accounting conservative is basically on the assets, revenues, liabilities and expenses. The rules enable the business state the values both the assets and revenues to be intentional but still understated, which is an advantage to the business (Ruch et al, 2014). On the other hand, the rules state that the values of expenses and liabilities to be overstated which is also an advantage to the business. This means that the method causes the values of the business’s future profit levels to be low and the expenses to be high.

The other impact is that the principles ensure that the business’s potential and current revenue and other financial aspects to shift with time (Mora et al, 2015). For instance, when the features or values of a certain transaction or operation are not clear or certain, the operation or transaction is not recorded on the current financial year and instead it will be recorded in the next year’s financial recording. This means that the current report values will be understated while the next year’s report to be high.

Conservative method like historical cost relates to the actual monetary value of an operation or transaction. Therefore, the methods states that the lower value or cost of the report aspect should be recorded. Therefore, in the case of Amazon, the CEO would not like to use the conservative method because this will mean complete and certain financial recording and documentation of the business revenue, expenses and assets. The CEO will have to wait longer than anticipated or for the reward which he will not sure of receiving. On the other hand, the company will prefer the use of conservative method because it will get the opportunity to be certain and sure of its revenue and asset value estimation as well as the expenses that it incurred to earn the revenue. The method will ensure that the CEO does not receive any credit or reward before the share values and revenues are estimated and compared with expenses incurred. The method certainly favors the business but not the CEO.

References

Mora, A., & Walker, M. (2015). The implications of research on accounting conservatism for accounting standard setting. Accounting and Business Research, 45(5), 620-650.

Ruch, G. W., & Taylor, G. (2015). Accounting conservatism: A review of the literature. Journal of Accounting Literature, 34, 17-38.

Ruch, G. W., & Taylor, G. K. (2014). The Effects of Accounting Conservatism on Financial Statements and Financial Statement Users: A Review of the Literature.

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The capital market research relates to the provision of financial information statement on capital markets. Research has shown that there is a lot of demand for capital market research in various industries. Apparently, the business have different reasons as to why they need the research, including to perform a fundamental analysis and evaluation, to test the efficiency of capital markets, to determine the value of accounting and financial recording in the political sector and to perform the duty to disclose capita market information (Solomon, 2007). This means that capital market research is a crucial process for businesses to conduct simply because it provides the businesses with opportunities to identify and evaluate all the products and services required and needed by the customers. With capital market research, businesses are capable of experiencing the following benefits:

Capital market research is a process that can help business organizations to enhance its profit making capabilities and expense control. The research is based on evaluating and analyzing a business’s supply and demand for commodities.

Through capital research, businesses are also able to improve their communication structure and methods with the customers. When a business conduct capital research, they get to understand the market, the consumers and their needs (Muresan, 2012). Therefore, they are able to establish the customers’ reactions to their products or services.

Through capital market a business is in a position to evaluate its marketing strategies, policies and principles. This will be used especially to determine the best market opportunities for the business, its products and services (Bennouri et al, 2010).

Capital market research offers contribution in reducing and minimizing business potential risks

It is used to evaluate the business’s performance, i.e. whether the company is moving towards the achievement of its goals and objectives or not.

Therefore, it is important to note that, capital market research is and will always be one of the most important processes for a business to undertake if its needs to understand its market structure and its capability. Also, if a business needs to achieve any of the above objectives, then it is important to conduct a capital market research to be successful. In addition to that, it is certainly important to conduct a capital market research before investing in the stock market (Namazi et al, 2009).

In the case of Amazon Company, the company’s investors and the shareholders claim that the company’s revenue can go on increasing but the profit margins will never be enough for the market. This means that the company lacks the capability of staying in the market for as long as the shareholders thought or has estimated. The decrease in profit making levels is lowering its performance in the capital market which is also affecting the stock market hence decreasing investors’ value for the company. The shareholders are certainly hinting that the company’s management should look back and conduct a thorough capital market research and ensure that its services are actually needed by the consumers. The investors also think that the company is not certain of its position in performance which apparently declining with time. Low levels of profits is a clear indication of poor performance resulting from ineffective capital market research.

References

Bennouri, M., Clark, C. R., & Robert, J. (2010). Information provision in financial markets. Annals of Finance, 6(2), 255-286.

Muresan, D. (2012). Retrospective Of Financial Reporting On Capital Market. Annales Universitatis Apulensis: Series Oeconomica, 14(2), 395.

Namazi, M., & Nazemi, A. (2009). CAPITAL MARKET RESEARCH IN ACCOUNTING: EVIDENCE FROM THE TEHRAN STOCK EXCHANGE. Asian Academy of Management Journal of Accounting & Finance, 5(2).

Solomon, J. (2007). Corporate governance and accountability. John Wiley & Sons.

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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 refers to simple but efficient decision making process that involves rules and principles that guide an individual towards the right and effective decision. Heuristics are applicable especially when an individual has to make a choice between two options and offers the chance for them to focus and concentrate fully on the chose option (Mousavi et al, 2014). The following some of the types of heuristic categories:

Psychologically speaking, availability refers to the ease of bringing something or idea into someone’s mind or rather the ease of thinking about something. Therefore, the availability heuristic basically depends on the mental capacity of an individual to bring the mind up for thinking. This means that the individual is likely going to make their decision on how fast, easy and frequent a though crosses their mind (Marewski et al, 2010). This heuristic is often used whenever trying to make a decision or judgment call. There are some problems associated with the use of availability heuristic. For instance, the heuristic assumes that whenever a decision, idea or a judgment call appears in our minds easy, fast and frequent, then it can be said to be a matter of common sense or simple (Story et al, 2015). On the other hand, the heuristic has proved to be very effective and efficient in helping humans out. For instance in an extremely dangerous situation, then by thinking of certain specific scenario that seemed completely alike and the results involved in any choice, then the chances of making the right judgment are more.

Representativeness stand for a representation of something or someone. This heuristic involves a person’s own image or idea as it is known to them. It helps an individual to compare the actual or real situation with their picture in their own minds. These images are known as prototypes. Therefore, it can be said that an individual with high representative heuristic has a prototype that is very similar to the real image being described. Just like any other heuristic, representative heuristic saves time and energy when making a decision or judgment (Pohl et al, 2010). This is because whenever an individual is faced with a decision, the person imagination helps them make the decision. The individual already had the idea and the results of each decision choice. However, it can lead to biasness and failure in other cases (Neth et al, 2015).

This heuristic is derived from the word “anchor” whereby it is the first and foremost thing that can provide protection and firmness. This heuristic is used when an individual relies too heavily on a first option or information that is provided before making the decision. In this heuristics, the individual does not have to think deeper to decide what decision to make, but their idea and though are already with the first option given (Gigerenzer et al, 2011). The individuals in this heuristics believe that the right option is one that nears the anchor.

Other heuristics include: after heuristic, base rate heuristic, naïve diversification, escalation and commitment and familiarity heuristic to name a few. However, the best heuristic for a potential Amazon investor should be the anchor heuristic. This is because the company will provide as much information as possible about its operations, share value, profit levels and many other issues that relate to shareholding and investing. The company will be looking forward to welcome them as investors and so it will provide the most reliable, valid and true information (with evidence) they can to get one on board. Through this, the investor will get enough reliable data to rely on before making their final investment decision.

References

Gigerenzer, G., & Gaissmaier, W. (2011). Heuristic decision making. Annual review of psychology, 62, 451-482.

Marewski, J. N., Gaissmaier, W., & Gigerenzer, G. (2010). Good judgments do not require complex cognition. Cognitive processing, 11(2), 103-121.

Mousavi, S., & Gigerenzer, G. (2014). Risk, uncertainty, and heuristics. Journal of Business Research, 67(8), 1671-1678.

Neth, H., & Gigerenzer, G. (2015). Heuristics: Tools for an uncertain world. Emerging trends in the social and behavioral sciences: An interdisciplinary, searchable, and linkable resource.

Pohl, R. F., & Vitouch, O. (2010). Recognition-based judgments and decisions: Introduction to the special issue (Vol. 1) Julian N. Marewski Max Planck Institute for Human Development, Berlin, Germany. Judgment and Decision Making, 5(4), 207-215.

Story, G. W., Vlaev, I., Dayan, P., Seymour, B., Darzi, A., & Dolan, R. J. (2015). Anticipation and choice heuristics in the dynamic consumption of pain relief. PLoS computational biology, 11(3), e1004030.

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.

Critical theory, is the use of reflective assessment and critiquing the society and its culture by implementing the social sciences and humanities knowledge. Critical theory in accounting is used mainly to provide a better environment for the increasing number of accounting researcher and practitioners (Bronner, 2017). Most of the researchers and practitioners who use this theory, assume that the conventional theories are outdated and not well suited for the modern technology and improving accounting standards and its surrounding environment. In addition to that, the theory states that the modern accounting practices are much more connected with other environmental aspects like problems facing ecological, social and resources allocation (Oluwadare et al, 2015). Therefore, the critical theory views to improve and increase the strength of the connection by reformulating the corporate, social and political aspects of the environment in relation to business accounting practices. Furthermore, the theory focuses on the theoretical and practical manner in which other theorists view and affect accounting practice (LaCapra, 2016).

The Amazon Company being a very old business, it had been using outdated accounting methods and practices. Actually the conventional theories certainly viewed its practices to be less effective and useless to the social, ecological and political environment. The conventional theories portray negative opinions and understanding of the company’s accounting practices (Coetsee, 2010). However, the critical is completely the opposite. The Amazon accountants use its accountants like just tools to record, document and analyze the financial trends of the company, i.e. cash-in and cash out-out. They are treated as just accountability options which is exactly the opposite of what critical theory tries to understand the practice. The accountants and financial analysts and advisers should be viewed as important aspects of the environment as well whose actions can affect both the social and political world. Therefore, in that case, while the company tries to improve its overall performance, it is also working in better ways of involving its employees into its system to benefit the surrounding environment.

References

Coetsee, D. (2010). The role of accounting theory in the development of accounting principles. Meditari: Research Journal of the School of Accounting Sciences, 18(1), 1-16.

Bronner, S. E. (2017). Critical theory: A very short introduction. Oxford University Press.

LaCapra, D. (2016). Soundings in critical theory. Cornell University Press.

Oluwadare, E., & Samy, M. (2015). The relevance of Critical Accounting Theory (CAT) to effectiveness of public financial accountability in emerging economies. Canadian Social Science, 11(9), 20-25.

Smith, M. (2017). Research methods in accounting. Sage.

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