Impact of Creative Accounting on Strategic Decision-Making

This report explores the impact of creative accounting techniques on strategic decision-making, focusing on the strategic importance of cash flow management and limitations of ratio analysis. It discusses how creative accounting can influence financial data presentation and strategic choices, while also highlighting the importance of accurate financial statements and the potential pitfalls of relying on historical data. The report also examines the role of cash flow management in evaluating capital expenditure proposals, emphasizing the importance of managing cash flows to finance investments and assess project viability. Additionally, it covers the limitations of ratio analysis, such as the impact of price level changes and variations in accounting methods, offering a comprehensive overview of key financial concepts for strategic managers.

Impact of creative accounting techniques for making strategic decisions
Creative accounting technique may be defined as an activity, which helps the
company in manipulating financial data on companies. For example, by implementing a
unique method for accounting of company's financial transactions such as accounting
treatment of inventory valuation, this may help the executives directors in taking strategic
decisions related to its inventory valuation.
Limitations of ratio analysis as a tool strategic decision business:
There are various limitations of ratio analysis to an organisation; some of these
are as follows:
False results based on incorrect accounting data: The reliance on the ratios may be
correct if it is based on the correct financial statements, this means that if financial
statements of a company is prepared in wrong manner that does not provide true and fair
results such as window dressing.
No idea of Probable Happenings in future: Ratios are based on historical data which
means that it is not suitable for future business operations because future business
operations are uncertain as in present condition complexities in business environment is
increased. Therefore, it may lead to wrong interpretation based on such historical
financial statements.
Variation of accounting Methods: By the help of ratio analysis, two companies
financial performances are measured.
But this method is not good as it may be happen that these companies are implemented
different accounting methods for recording its financial transactions.
Price level changes: Due to changes in the price level among various years leads to
wrong interpretation of ratio analysis. For example, turnover ratios of year 2001 and the
same ratios year 2012 shall not be compared accurately.
Importance of cash flow management in evaluating proposals for capital expenditure:
In measuring a capital investment proposal, company shall require to manage its
cash flows to finance its proposed investment proposal.
The various importance of cash flow management are as follows:
 A company by managing its cash flows in effective manner may utilise this in
investing its capital expenditure, as a result, company has not need to raises funds
from outside sources such as taking loans etc.
 It is further help the company in saving company's commission cost and finance
cost by having internal source for finance the proposed investment proposal.
 Cash flow management assists the company in evaluating its net cash flows and
net cash outflows (including initial investment) which it has occurred during the
lifetime of a capital investment project. This may help the company in asses the
viability of its investment proposal.
Finance for Strategic Managers