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.
- 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.
- 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.
- 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.