Window dressing

Raghavendra
M.B.A, M.Phil., P.G.D.I.T, (Ph.D)

Assistant Professor & H.O.D Dept. of MBA MITE

Introduction
Chairman

of the board: How much profit did we make last year? Finance director: What profit you want us to have made? You can take your pick from the following profit figures

 Window

dressing is presenting company accounts in a manner which enhances the financial position of the company. It is a form of creative accounting involving the manipulation of figures to flatter the financial position of the business.

The focus of window dressing:

Liquidity:

Hiding a deteriorating liquidity

position Profitability: Massaging profit figures

Definition of creative accounting:

A form

of accounting which, while complying with all the regulations, nevertheless gives a biased impression (generally favorable) of the companys performance. Creative accounting involves using the flexibility within accounting to manage the measurement and presentation of the accounts so that they serve the interests of people who prepare the accounts rather than those for whom the accounts are prepared.

Reasons for window dressing:

To show a stronger market position than is warranted To influence share price To reduce liability for taxation To hide liquidity problems To ward off takeover bids To encourage investors To reassure lenders of finance To hide poor management decisions To

satisfy demands of major investors concerning the level of return To achieve sales or profit target thereby ensuring that management bonuses are paid

Method used to window dress

Sale and leaseback Short term borrowing Chasing debtors Bringing sales forward Changing depreciation policy Including intangible assets Capitalising expenditure Changing stock valuation policy

Sale and leaseback

This

involves selling fixed assets to a third party and then paying a sum of money per year to lease it back. The business retains the right to use the asset but no longer owns it. The liquidity or cash position of the firm improves, but:
The asset no longer features on the balance sheet There is a continuing commitment to pay rental to use the asset The business is not tackling the liquidity problem

Short term borrowing

Short

term borrowing just before the date on which the balance sheet is drawn up This enhances the apparent ability to pay its short term debts But creates an additional liability

Chasing Debtors
Special effort to chase debtors before the balance

sheet is drawn up This might involve discounts for prompt payments Conversion of debtors into cash will improve the balance sheet and cash position of the organization Liquidity does improve, but at the expense of sales revenue

Bringing forward sales

Sales

show up in the P&L account when the order is received not when the cash is received Encouraging customers to place orders earlier than planned will increase the sales revenue figure in P&L A/c This brings sales forward from next year to this year The drawback is that sales cannot be included in next years figures

Changing depreciation policy

Increasing the expected life of the asset

Firms asset value in the balance sheet also increases

Including intangible assets

Brand name, goodwill, Patents etc.

Capitalising expenditure
Taking

revenue expense as a capital expense or vice versa Ex: Purchase of a Computer software with a useful life of 3 years If treated as a revenue expense, taken in P&L a/c as an expense If treated as capital expenditure, taken in Balance sheet under assets.

Stock Valuation
Change from LIFO to FIFO

Anything

which increases the value of closing stock will increase profits