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Window Dressing Business Accounts

Window dressing is used by business to make their balance sheets and income statements look more healthy or in some cases worse. It the current different climate businesses are in, window dressing has been used more than ever to cushion the drop in sales and revenue. However, window dressing a business account cannot hide everything. It is important to know what window dressing is in Business Studies A2 BUSS 3 as it is a possibility that with any statistical numerical data present in the BUSS 3 exam, there is always the possibility that the data has had a degree of window dressing to them.

The term ‘Window Dressing’ applies to the practice of making financial accounts look better or worse than they actually are.

There are two types of window dressing:

  • Account dressed up = better than they are.
  • Accounts dressed down = worse than they are.
Why Window Dress Accounts?
  • To influence the share price: the business might declare higher profit to maintain/boost share price.
  • Dress down account to avoid tax: declare lower profits to avoid tax.
  • To avoid take overs: alter values in the balance sheet to influence ‘book value’ of the company.
How Do Firms Window Dress Accounts?
(Point – Some methods are legal while some are fraud)
  • Valuation of assets.
  • Valuing intangible assets – e.g. brand values. Examples of this are Google that are valued at over £100 billion. How is this worked out?
  • Depreciation of assets such as vehicles and machines (tangible assets).
  • Appreciation of land, machines and property.
  • Write off’s – when firms become aware that they have assets or debtors that are worthless (e.g. a customer goes bust and can’t pay). Sometimes, firms delay the write off or drip feed it through accounts to avoid/spread the bad news.
  • Changing the timings of transactions. Remember that a balance sheet is merely a snapshot at a specific moment in time for a business. If change the time they pay their suppliers to happen after the ‘snapshot’, it will look as if their costs are much lower than they actually are.
Firms need to produce annual accounts for the year ending March 31st. Sometimes, firms are tempted to include or exclude sales/debtors/creditors until the following year to make the accounts look better or worse. This raises questions whether the business should include the contacts on direct debit or include the annual amount or just the money paid up until the year end.
Problems will emerge during the next following year if extreme window dressing has happened to a business’ balance sheet. 
  • AOL inflated tangibles over the year to a staggering $100 billion. This was wrote off in 2002.
  • ENRON in 2001 went bust with debts of $100 billion because they were counting costs as revenue. 
This goes to show that window dressing on extreme scales will seriously damage a business. Window dressing cannot hide big problems but merely clean a balance up to make it look that tiny bit better.

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