29 What Is Financial Window Dressing

29 What Is Financial Window Dressing



What is​ financial window dressing?
Financial managers can do certain things to​ increase or​ decrease net income that's recorded in​ the year .​
This is​ called profit smoothing, income smoothing or​ just plain old window dressing .​
This isn't the same as​ fraud, or​ cooking the books.
Most profit smoothing involves pushing some amount of​ revenue and/or expenses into other years than they would normally be recorded .​
a​ common technique for profit smoothing is​ to​ delay normal maintenance and repairs .​
This is​ referred to​ as​ deferred maintenance .​
Many routine and recurring maintenance costs required for autos, trucks, machines, equipment and buildings can be delayed, or​ deferred until later .​
A business that spends a​ significant amount of​ money for employee training and development may delay these programs until the next year so the expense in​ the current year is​ lower.
A company can cut back on its current year's outlays for market research and product development.
A business can ease up on its rules regarding when slow-paying customers are written off to​ expense as​ bad debts or​ uncollectible accounts receivable .​
The business can put off recording some of​ its bad debts expense until the next reporting year.
A fixed asset that is​ not being actively used may have very little current or​ future value to​ a​ business .​
Instead of​ writing off the un-depreciated cost of​ the impaired asset as​ a​ loss in​ the current year, the business might delay the write-off until the next year.
You can see how manipulating the timing of​ certain expenses can make an​ impact on net income .​
This isn't illegal although companies can go too far in​ massaging the numbers so that its financial statements are misleading .​
For the most part though, profit smoothing isn't much more than robbing Peter to​ pay Paul .​
Accountants refer to​ these as​ compensatory effects .​
The effects next year offset and cancel out the effects in​ the current year .​
Less expense this year is​ balanced by more expense the next year .​




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