Financial Analysis, Windows Dressing

Essay by Xman1993213University, Bachelor'sA, October 2014

download word file, 12 pages 0.0

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Keywords

Project at

Financial Analysis

on the topic

"Window Dressing"

Author:

Liviu Guțuleac

Lecturer:

dr Joanna Wyrobek

Cracow University of Economics, 2013

Acknowledgments

Introduction……………………………………………………………………………….…..........3Other nomenclature of creative accounting in literature……………………..……………….……4

Why do firms use Window Dressing?………………………..……………………….…….….…..4

Goodwill……………………………………….....………………...……………........……....……5

Artificial methods of boosting liquidity...……...……...………...………...…......………………...6

Receipts of receivables………...………...………...………...…….…...………...………....……...7

Income smoothing…………………………………………...………...………...………...…….....7

Bringing sales forward…....………...………...………...……………...………...………...……....8

Changing depreciation policies….…...………...………...………...………...…………..………...9

Changing the stock valuation policy………...………..………..………..………..………..….…...9

How to spot window dressing………..…………...………...………...……..…...………………...9

Conclusion………...………...………...………...…………………..……….…...……...………..10

Introduction

Despite of the growth of the potential importance of the summaries documents the accounting information doesn't achieves to fulfill the all functions assigned to it. Perhaps, the biggest peremptory of this finding are the numerous financial scandals that have occurred in the last decades. These financial scandals are based on the discovery of false information or in the discovery of new techniques that conceal the real situation of the firm.

The notion of creative accounting (windows dressing) was firstly found in the literature in 1973 by the British researcher J.

Argenti. He established a direct connection between the practices used by creative accounting, the incompetence of the managers and the declines in big businesses. He also specified that the usage of creative accounting is an ominous sign of a coming financial crisis.

Trotman (1993) defines window dressing, appreciating that it is a communication technique having in view the amelioration of the information provided to the investors. Thus, the economic entity is presenting to the investors or to the prospective investors financial statements passed through the filter of some techniques capable of generating a more favorable image on the market but also the illusion of some more attractive results that the normal.

Defining window dressing through a well-known practice, that is "the result of smoothing (smoothing income), Barnea, Ronen and Sadan (1976) appreciate that this makes its presence felt each time the profits have a high fluctuation,