Window dressing and financial statement.

Financial statements are said to be window dresses when management tries to show a better performance and financial position of the firm than its actual position.

Window dressing can be done in many ways……

Value of closing stock at higher value

Treating some expenditure as capital expenditure.

Revaluation of fixed assets on higher side.

Providing no provisions

No disclosure of extraordinary income.

Manipulation of accounts to show better picture of the firm in the form of ratio.

Satyam case : Manipulation of facts and figures.

Satyam books have been overstated by Rs 5,000 to Rs 6,000 crore.

Inflated (non-existent) cash and bank balances of Rs 5,040 crore (as against Rs 5,361 crore reflected in the books);

An accrued interest of Rs 376 crore, which is non-existent

An understated liability of Rs 1,230 crore on account of funds arranged by Mr.Raju

An overstated debtors' position of Rs 490 crore (as against Rs 2,651 reflected in the books)

For the September quarter(Q2) reported a margin of Rs 649 crore(24 per cent of revenue) as against the actual operating margin of Rs 61 crore

The aborted Maytas acquisition deal was the last attempt to fill the fictitious assets with real ones

Beneficiary Reason Window dressing

ActionWho is misled

CompanyTo obtain funding (to borrow money)

Increase profits and liquidity ratios

Borrowers (banks, other financial institutions)

To reduce tax payments

Decrease profits by increasing expenses

Government

To smooth financial data (sales, expenses, accounts receivable, etc.)

Record sales or purchases in an inappropriate period;give large discounts to debtors for payments received before period end

Owners

To hide some problems (liquidity, profitability, poor management decisions)

Increase cash account balance at the period end; increase useful life of fixed assets

Owners

PROFIT & LOSS ASIANP BERGER

Gross Sales 6,322.24 2,100.82

Net Sales 6,322.24 2,100.82

Total Operating Income 6,322.24 1,975.32

Raw Materials Consumed 3,681.53 1,275.73

Other Direct Expenses 105.56 120.52

Payments to Employees 300.45 64.86

Other Administrative Expenses 1,090.20 75.50

Operating Profit BDIT 1,144.50 217.40

Depreciation 94.48 29.98

Operating profit 1,050.02 187.42

Income from Non-Operating Activities

88.16 35.87

PBIT 1,138.18 223.29

Interest 15.35 12.18

PBT 1,122.83 211.11

Provision for Taxes 325.49 1,096.86

Deferred Taxes 26.41 0.00

Book value: it is the value at which an items appears in the books of account or financial statement.

Entity value: it is calculated by considering market value.