In accounting parlance window dressing in the balance sheet is the technique by which financial statement is made to reveal a better picture than the actual position. Let us study here how a balance sheet can be window dressed.
Window dressing in balance-sheet:
In P&L Account
(*) [The FIFO and LIFO methods are used for accounting inventories like raw materials, work in progress, and finished goods. FIFO refers to ‘first-in, first-out’ which means the oldest inventory items are recorded as sold first. LIFO refers to ‘Last-in, first-out’ which means the most recently produced items recorded as sold first. The companies may change method of valuation of stocks from FIFO to LIFO or vice versa to make changes in profit figures when raw materials are purchased at different prices during the period.]
The window dressed items like showing expenses towards routine repairs or investment in intangible assets as tangible assets and recording bogus sales are misleading the bankers in absolute terms. Therefore it is essential to be very careful in the judgment of qualitative aspects of Balance-Sheet/ Profit and Loss Accounts. From the above cases of window dressing, we may infer that a balance-sheet has its own limitations. However, Auditor’s report, notes, and annexures to the balance sheet help us to detect many latent problems, although Auditor has his/her own limitations.
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