Consequences window dress cashflow reporting
However, loans obtained in this way might cause an actual cash crunch when window dressing can no longer hide anemic cash flows.
Explain window dressing as a limitation of financial analysis
Tracy When approaching the accounting, you need to be aware of window dressing. History is replete with examples in which corporations created phony earnings. Suppose a company writes a check and does not deduct that payable amount before the check is actually deposited, allowing the funds to be reported instead in operating cash flow as cash on hand. The company eventually folded and top executives went to prison. Another ploy is to defer supplier expenses until a later period. Window dressing can be the first step on a slippery slope. This is similar to delaying the recognition of written checks. Ostensibly, the cash flow is the difference between how much money is generated versus how much is spent on operations. So what do you do to avoid setting off alarm bells? It can postpone payments to enhance its cash balance and record a low bad-debt reserve to make accounts receivable look stronger.
Current assets and current liabilities of a business, before window dressing. Executive compensation is often tied to stock price performance.
Hoodwinking the Shareholders Another motivation for corporate window dressing is to jack up stock prices. Suppose you manage a business and your controller has just submitted for your review the preliminary, or first draft, of the year-end balance sheet.
Fooling the Bankers One motivation for gussying up a balance sheet is to help qualify for a bank loan.
A little window dressing today, and tomorrow, who knows? Suppose, for example, that a business holds open its cash receipts journal for several days after the close of its fiscal year. However, it isn't always that straightforward.
A better cash flow can result in higher ratings and lower interest rates.
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