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Creative Accounting Techniques of Company

   

Added on  2020-06-04

2 Pages519 Words77 Views
Creative accounting techniques aredeployed by company in order tomanipulate financial statements so thatstock of organisation be injected ineffective manner and as such, earnings canbe achieved with much ease. It providesbenefits to business in long term and short-term as well. Thus, this technique isapplied not to mislead users of accountinginformation but for the purpose ofincreasing value of shares in effectualmanner. The techniques such as use of extra non-recurring items, excess of revenuerecognition etc. The method of creativeaccounting is slush fund accounting whichmeans that some figures are hidden and notdisclosed to management to make up theirbonuses is one of the best example of thismethod. Moreover, creative accounting techniquesimpacts businesses in effective manner.Business is quite benefited by it as positiveimage is being provided to variousstakeholders and as such, more earningsmay be made with ample of investmentinitiated by shareholders. This affect strategies of organization and itprovides positive image to shareholders ineffectual way. However, creativeaccounting should be with reference tolimit imposed by law. Ratios have certain shortcomings whichdistorts company's real position. Thelimitations are as follows-A financial ratio completelyignores qualitative aspects ofbusiness and considers onlyquantitative aspect. It is misleadingwhen inflation prevails andfinancial statements are prepared inaccordance with which distortsreliability. Another limitation of ratios is thatit is based on past facts and figureswhich do not reflect current trendof business. Moreover, if accounting records aremanipulated then reliability ofinformation is misguided.Thedetails related to culture,heritage etc. has beencollectedThis provides misleading results ofratios. Accounting policies arefollowed differently by variousorganizations. Thus, financial ratios cannot becompared and results are not good.It is not suitable as it ignoresqualitative information which ismuch required in the company.Window dressing in financialstatements leads to false results ofratios calculated on such basis. Valuation of inventory is alsodifferent in organizations and ratioscomputed are not useful forextracting outcomes.There is enough importance of cash flowmanagement especially in capitalbudgeting. This is essentially required as businesspurchases and acquire assets in order toexpand operations in the best possible way.Cash flows are affected and as such, it isrequired that project should yieldmaximum returns in the future. Cash flow management is essentiallyneeded as investment is done in capitalproject by analysing estimated cashinflows and outflows to understand theviability of new project. NPV, IRR, payback period are calculatedso that attractiveness of project may beeasily evaluated. Cash flow management is required to bestreamlined so that business may be able togarner greater returns by investing in the

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