making a company look better financially than it really is. Assume just before the end of the accounting year current assets are $100,000 and current liabilities are $50,000, representing a current ratio (current assets/current liabilities) of 2:1. To improve its current ratio for the annual report in order to attract prospective lenders, the company window-dresses by paying off $30,000 in current debt. This now makes current assets $70,000 and current liabilities $20,000, resulting in a misleading current ratio of 3.5:1. This current ratio is temporary and deceiving because, most likely, at the beginning of the next accounting year the firm will borrow additional short-term funds that reduce the current ratio.
special adjustments in financial position to give the appearance of adequate liquidity, often to comply with reporting requirements. It gives the ppearance of a healthy balance sheet, whereas actual conditions may state otherwise. For example, an organization might buy U.S. Treasury securities and other cash equivalent securities to build up its cash position.
Window dressing, or sprucing up the balance sheet, takes place just before the statement date, for example, at the end of a fiscal year or quarter, and is intended to add size to the financial institution. Mutual funds sell off securities not preferred by the public, and purchase securities preferred by the public. Fund managers sell junk bonds held for yield, in favor of AAA-rated securities for appearance.
- ltrading activity near the end of a quarter or fiscal year that is designed to dress up a portfolio to be presented to clients or share-holders. For example, a fund manager may sell losing positions in his portfolio so he can display only positions that have gained in value.
- accounting gimmickry designed to make a financial statement show a more favorable condition than actually exists-for example by omitting certain expenses, by concealing liabilities, by delaying write-offs, by anticipating sales, or by other such actions, which may or may not be fraudulent.