- Window Dressing
Window dressing refers to procedures used to enhance the visual appeal of a company's financial accounts. When a firm has many shareholders, window dressing is especially prevalent so that management may present a well-run corporation to investors who likely do not have much day-to-day interaction with the company.
It might also be employed by a business to win over a lender so that it might get a loan. There is no motivation for anyone to add window dressing to the financial statements because the owners of a closely held company are typically more knowledgeable about the business's performance.
Examples Of Window Dressing
These are some examples of window dressing. These steps are conducted just before an accounting period comes to a conclusion.
- Cash Window Dressing: Postponing supplier payments causes the cash balance at period's end to appear bigger than it actually is.
- Accounts Receivable Window Dressing: In order to make the accounts receivable (and hence the current ratio) statistic look better than it actually is, record an exceptionally low bad debt expense.
- Capitalization Window Dressing: To boost reported profits, capitalize minor expenses that would often be written off as a cost.
- **Fixed Assets Window Dressing: **The net book value of the remaining assets tends to reflect a relatively recent cluster of assets by selling those fixed assets that have significant amounts of accumulated depreciation connected with them.
- Revenue Window Dressing: Give consumers a discount for early shipment to bring income from a future period into the present.
- Depreciation Window Dressing: Reduce the amount of depreciation charged to expense in the current period by switching from accelerated to straight-line depreciation. Another method for postponing expense recognition is to utilize the mid-month convention.
- Expenses Window Dressing: Keep supplier invoices on hold so they can be recorded later.
Purpose Of Window Dressing In Accounting
If the company's finances appear decent, shareholders and potential shareholders will be interested in investing.
- Trying to get money from investors or getting a loan can be helpful.
- If the company's financial performance is strong, its stock price will soar.
- Tax evasion can be accomplished by displaying subpar financial outcomes.
- To hide the terrible management choices that were made.
- It strengthens the company's liquidity situation.
- To demonstrate a consistent profit and outcomes for the business.
- It serves to reassure lenders about the company's financial viability.
- To reach certain financial goals, this is done.
- To demonstrate a strong return on investment, it is done.
Top Methods Of Window Dressing In Accounting
- Cash/Bank: Delaying supplier payments to ensure a large cash/bank balance at the conclusion of the reporting period
- Inventories: Adjusting the value of inventories in order to boost or cut earnings.
- Revenue: To increase sales at the end of the year and improve the company's financial performance, businesses often offer products at a discount or make special offers.
- Depreciation: The profits are increased when the depreciation method is switched from accelerated to straight-line.
- Creation of Provisions: According to the idea of caution in accounting, revenue should only be recorded once it has been realized or ensured. Expenses and liabilities should be recorded as soon as practicable. The profits and associated tax payment may be decreased if an excess provision is made.
- **Short Term Borrowing: **To sustain the organization's liquidity position, short-term borrowing is obtained.
- Sale and Leaseback: Selling the assets prior to the fiscal year's end, utilizing the proceeds to maintain the business's liquidity position and fund operations, and leasing them back for a longer period of time to support operations.
- Expenses: Presenting the capital expense as a revenue expense to inflate the revenue.
Window dressing is a short-term strategy used in accounting to make financial statements and portfolios appear better and more enticing than they actually are. It's done to deceive investors about actual performance. Given that it entails lying and is carried out for management's benefit, the technique is unethical.