ASSIGNMENT ON WINDOW DRESSING

SUBMITTED BY-GOBINDA SUBEDI (21BSP0339)

What is Window Dressing?
Window dressing is actions taken to improve the appearance of a company's financial
statements. Window dressing is particularly common when a business has a large number of
shareholders, so that management can give the appearance of a well-run company to
investors who probably do not have much day-to-day contact with the business. It may also
be used when a company wants to impress a lender in order to qualify for a loan. If a
business is closely held, the owners are usually better informed about company results, so
there is no reason for anyone to apply window dressing to the financial statements.
Companies typically window dress their financial statements by selling off assets and either
purchasing new assets or using this money to funds other operations. This way the cash
balance on the balance sheet appears to be at a normal amount.
Unfortunately, this strategy can only fool novice investors. Experienced investors can
analyze the statement of cash flows and long-term assets to see that the company is
funding current operations by selling off assets.
Ethics of Window Dressing
The entire concept of window dressing is clearly unethical, since it is misleading. Also, it
merely robs results from a future period in order to make the current period look better, so
it is extremely short-term in nature.
Examples of Window Dressing
Window dressing is probably most commonly found in investment brokers and mutual fund
houses. Mutual fund managers often sell off poor performing stock and other investments
near the end of a period and use the money to buy high performing stock. This way new
investors see the portfolio of high performing stock and want to invest. Obviously, this is
only a short-term strategy for novice investors. Any experienced investor will analyze
portfolio trends over the past few periods to see if the funds managers are investing wisely.
Examples of window dressing are as follows:
Cash. Postpone paying suppliers, so that the period-end cash balance appears higher than it
should be.
Accounts receivable. Record an unusually low bad debt expense, so that the accounts
receivable (and therefore the current ratio) figure looks better than is really the case.
Capitalization. Capitalize smaller expenditures that would normally be charged to expense,
to increase reported profits.
Fixed assets. Sell off those fixed assets with large amounts of accumulated depreciation
associated with them, so the net book value of the remaining assets appears to indicate a
relatively new cluster of assets.
Revenue. Offer customers an early shipment discount, thereby accelerating revenues from a
future period into the current period.
Depreciation. Switch from accelerated depreciation to straight-line depreciation in order to
reduce the amount of depreciation charged to expense in the current period. The mid-
month convention can also be used to further delay expense recognition.
Expenses. Withhold supplier invoices, so that they are recorded in a later period.
These actions are taken shortly before the end of an accounting period.