Impact of Creative Accounting on Financial Statements & Cash Flow

This report delves into the realm of creative accounting, exploring its techniques and impact on financial statements. It examines how companies manipulate financial data to present a more favorable image, influencing stakeholder perceptions and investment decisions. The report highlights the significance of cash flow management, particularly in capital budgeting, emphasizing the importance of analyzing inflows and outflows to evaluate project viability. Furthermore, it discusses the limitations of financial ratios, including their reliance on historical data, potential for manipulation, and inability to capture qualitative aspects of a business. The report emphasizes the need for a comprehensive understanding of these concepts to make informed financial decisions and to assess the true performance of a business.

Creative accounting techniques are
deployed by company in order to
manipulate financial statements so that
stock of organisation be injected in
effective manner and as such, earnings can
be achieved with much ease. It provides
benefits to business in long term and short-
term as well. Thus, this technique is
applied not to mislead users of accounting
information but for the purpose of
increasing value of shares in effectual
manner.
The techniques such as use of extra non-
recurring items, excess of revenue
recognition etc. The method of creative
accounting is slush fund accounting which
means that some figures are hidden and not
disclosed to management to make up their
bonuses is one of the best example of this
method.
Moreover, creative accounting techniques
impacts businesses in effective manner.
Business is quite benefited by it as positive
image is being provided to various
stakeholders and as such, more earnings
may be made with ample of investment
initiated by shareholders.
This affect strategies of organization and it
provides positive image to shareholders in
effectual way. However, creative
accounting should be with reference to
limit imposed by law.
Ratios have certain shortcomings which
distorts company's real position. The
limitations are as follows-
 A financial ratio completely
ignores qualitative aspects of
business and considers only
quantitative aspect. It is misleading
when inflation prevails and
financial statements are prepared in
accordance with which distorts
reliability.
 Another limitation of ratios is that
it is based on past facts and figures
which do not reflect current trend
of business.
 Moreover, if accounting records are
manipulated then reliability of
information is misguided.The
details related to culture,
heritage etc. has been
collected
 This provides misleading results of
ratios. Accounting policies are
followed differently by various
organizations.
 Thus, financial ratios cannot be
compared and results are not good.
It is not suitable as it ignores
qualitative information which is
much required in the company.
Window dressing in financial
statements leads to false results of
ratios calculated on such basis.
 Valuation of inventory is also
different in organizations and ratios
computed are not useful for
extracting outcomes.
There is enough importance of cash flow
management especially in capital
budgeting.
This is essentially required as business
purchases and acquire assets in order to
expand operations in the best possible way.
Cash flows are affected and as such, it is
required that project should yield
maximum returns in the future.
Cash flow management is essentially
needed as investment is done in capital
project by analysing estimated cash
inflows and outflows to understand the
viability of new project.
NPV, IRR, payback period are calculated
so that attractiveness of project may be
easily evaluated.
Cash flow management is required to be
streamlined so that business may be able to
garner greater returns by investing in the

project. Thus, it can be said that cash flow management is important while investing
in new project.