Accounting, Finance, SPSS Term Paper: Conservatism

Conservatism
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Conservatism
Accounting conservatism are the guidelines surrounding financial reports, which compel accountants to exercise a high level of verification and use the solutions to predict the least numbers when confronted with uncertainty. The longstanding principle tends to protect financial information users from the consequences of inflated revenues and to guarantee the potential liabilities are put down as soon as they are recognized. This essay purposes to examine how the conservatism principle can be used in the Dolphin energy company. Additionally, it will also touch on the pros and limitations of conservatism when applied successfully.
Company Description
Dolphin uses mass-market techniques to serve its products. In mass marketing, the market addresses all market addresses all parts of the market as if they are the same. This is also known as undifferentiated marketing. Market segmentation includes demographic, behavioral, demographic and psychographic. The demographic segmentation of Dolphin includes the age and income. Dolphin is trying to reach three different target markets. The first segmentation is the people between 18 to 24 years who belong to college or have just completed college. The people who belong to this market have access to a modest income that takes the form of parental funds. Additionally, the beverage assists with studies and recreation. The second target market is the people belonging to the age bracket of 14-18. Studies have shown that the people within this age bracket are more energetic than older people (Alsunni, 2020). Dolphin seeks to replenish water, carbohydrates and electrolytes in people who work out or participate in physical education. Research suggests that the energy drink not only provides additional energy but also improves mood, enhances one’s physical endurance, reduces mental fatigue and increases reaction time. Dolphin satisfies customers who have health concerns and focuses on a wellness program at a reasonable price. The third target market is the people who belong to the age bracket of 24 to 34. People within this age bracket often tend to exert themselves physically. The energy drink replenishes lost energy and reduces mental fatigue whenever someone puts in over time. Additionally, these people are often able to afford the price of buying energy drinks. A recent analysis showed that 44% of energy drink customers belong to the age bracket of 18 to 24, 36% belong to the age bracket of 14 to 18 and 20% belong to the age bracket of 24 to 34.
Identifying the Need for Accounting Conservatism
Microenvironments consist of consumers, competitors and partners. Firstly, a change in consumer preference can negatively impact the company returns (Glasserman & Mamaysky, 2016).. For instance, customers may stop buying Dolphin energy drinks due to the rise of new products in the market. New products tend to be cheaper in order to build a customer base. Secondly, the company has potential competitors like Red Bull, Shark and Rhino. These energy drink companies have been in the market for many years and will have a loyal customer base. These competitors might negatively impact the sale of Dolphin. That being said, Dolphin is a relatively new company and the price of the energy drink will gradually increase once it has loyal customers. However, actions of the supplier can negatively impact the company. Suppliers usually provide the company with the raw materials that it needs to produce goods and services. Delayed supplies often lead to the loss of customers. Last but not least, Random shifts in foreign exchange rates and trade policies are a threat to the package industry. Exchange rate is the value of a certain currency for the purpose of converting to another. A weak currency makes things more expensive while making them cheaper for overseas customers. For instance, a weak US dollar makes exporting easy while allowing the company to remain competitive. Coincidentally, a strong dollar reduces competition by making imports cheaper.
Although there is a large customer base for energy drinks, the market is largely impacted by a number of health issues. A recent review by the World Health Organization highlighted the health risks associated with the consumption of energy drinks. The review states that many youths tend to mix energy drinks with alcohol at parties. Additionally, many negative impacts of energy drinks are linked to high caffeine content. It further pointed out that the potential risks of excess energy drink consumption are: Overdose of caffeine, which may lead to palpitations, convulsions, and vomiting and high-blood pressure. Secondly, type two diabetes, which results from, reduced insulin due to high caffeine intake (National Health Service, 2020). Thirdly, women may experience late miscarriages. Fourthly, excessive intake may also lead to cardiovascular and neurological effects on children and youths. Fifthly, excessive consumption may make them transition from the use of caffeine to more harmful substances. Last but not least, caffeine may also lead to obesity when taken in excess. The practice of mixing alcohol with energy drinks can also lead to ‘wide awake drunkenness.’ Therefore, people may engage in risky behavioral practices like violence and unprotected sex. Due to the impacts stated above, certain policies were put in place in EU member countries. These policies ensure that energy drink companies label the drinks with ‘High caffeine content. Not recommended for breastfeeding women and children.’ To add on that, the level of caffeine content should be written on the energy drink cans. These factors all imply the need for conservatism as an accounting principle.
Application of Conservatism
Unconditional conservatism, also known as balance sheet conservatism is where the value of a company asset on a balance sheet is less than its neutral value. There are two types of accounting practices, which lead to unconditional conservatism. The first type is where an accountant decides not to recognize expenditures that were made while expecting future benefits as investments. For instance, the resources invested by Dolphin Company in researching ways of expanding the customer base. This is the main reason why balance sheets are downright conservative. The second type of conservatism is seen in the measurement of assets. For instance, most of the investments made by the company have a limited economic life and give rise to economic benefits over several economic periods. For instance, Dolphin Company may open a branch in a different city with the aim of expanding its global reach. This investment may be costly but the branch will guarantee profitability after a year. Normal accounting entails choosing a depreciating schedule that matches the financial benefits of the project against the cost. Conservative rates are the deprecating rates that are bigger than the overall deprecation economic rates (Ta...