Window Dressing Techniques
What is Window Dressing and the techniques the companies normally use to manipulate a set of account ?
Window dressing is the act of showing a better position in the financial statements than actually exist. It is a form of creative accounting and while the financial statements have been prepared in accordance with accounting standards there is bias in the way the figures are presented.
The aim of window dressing is to improve the financial statements and show them in a more favourable light than they should be. It can be used to hide the liquidity problems or to make financial statements look better to present to lenders of finance and ti encourage investors.
Window Dressing techniques:
1) Sale and leaseback – companies sell assets before the year end and lease them back to increase cash but do not involve a commitment to pay rentals. They entity may sell the assets before the year end and lease it back post year.
2) Short Term borrowings – this is another technique where companies borrow short term loans just before year end to show a better ability to repay debts although it does increase liabilities.
3) Receipts of Receivables – this is about asking customers to pay their debts early so the cash is received before the balance sheet date. Discounts are usually offered to the customers so they will agree to this. This makes the cash position look better and it does improve liquidity but it usually reduces profits.
4) Bringing sales forward - asking customers to take sales early so they can be recognised before the year end. This increases revenue and profits but not cash. Unfortunately it brings problems for following financial year as the sales can not be recognised again, so effectively the company is taking next year’s sales into the current year.
5) Changing depreciation policies – if an entity decides to extend the useful life of non-current assets this will reduce the income statement depreciation charge and improve the asset
Window dressing is the act of showing a better position in the financial statements than actually exist. It is a form of creative accounting and while the financial statements have been prepared in accordance with accounting standards there is bias in the way the figures are presented.
The aim of window dressing is to improve the financial statements and show them in a more favourable light than they should be. It can be used to hide the liquidity problems or to make financial statements look better to present to lenders of finance and ti encourage investors.
Window Dressing techniques:
1) Sale and leaseback – companies sell assets before the year end and lease them back to increase cash but do not involve a commitment to pay rentals. They entity may sell the assets before the year end and lease it back post year.
2) Short Term borrowings – this is another technique where companies borrow short term loans just before year end to show a better ability to repay debts although it does increase liabilities.
3) Receipts of Receivables – this is about asking customers to pay their debts early so the cash is received before the balance sheet date. Discounts are usually offered to the customers so they will agree to this. This makes the cash position look better and it does improve liquidity but it usually reduces profits.
4) Bringing sales forward - asking customers to take sales early so they can be recognised before the year end. This increases revenue and profits but not cash. Unfortunately it brings problems for following financial year as the sales can not be recognised again, so effectively the company is taking next year’s sales into the current year.
5) Changing depreciation policies – if an entity decides to extend the useful life of non-current assets this will reduce the income statement depreciation charge and improve the asset