Finance for Strategic Managers: Accounting Techniques and Analysis

This report examines creative accounting techniques, which are used to manipulate financial statements, and contrasts them with the benefits of effective cash flow management. It highlights the unethical nature of creative accounting, which distorts financial information and misleads stakeholders, ...Read More

Finance for Strategic Managers: TASK 3
‘Creative accounting’ techniques.
‘Creative accounting’ is an effective accounting practice as it
follows standard laws and regulations. Creative accounting technique
capitalise on loopholes in the various accounting standards in order to
falsely depict a better image of the organization. Financial statements of
the company is used to analyse the financial health of the company.
However, when organization gets indulged in creative accounting then
this distort the worth of financial information. This leads to tweaking of
amounts which leads to higher valuation of the company. There are
various techniques such as overestimation of revenues, lowering
depreciation charge, delaying expenses, masking of contingent liabilities,
manipulation of inventory, etc. ‘Creative accounting’ techniques is an
unethical practice as it leads to distortion of reality by changing figures.
It also misleads to the various users of financial statements.
Limitations of ratio analysis.
Ratio analysis is a method which helps in evaluating the financial
health and performance of the company. They highlight the financial
statements and determines the relationship between various items in the
statements which in turn helps in assessing the financial performance and
health of the organization. There are various limitations of ratio analysis
which includes:
 Financial ratios does not take into consideration qualitative and
non- monetary transactions of the firm.
 This does not resolve the financial problems of the firm.
 It is based on past historical data which does not results in
accurate information.
 It may lead to skewness of the results which in turn affects the
viability of the outcomes.
 Ratio analysis does not integrate accounting policies which may
lead to biases and does not exhibit true information on
comparison between two or more companies.
Benefits of cash flow management
Cash flow management is an effective process as it
helps in tracking inflow and outflow of the money from the
organization.
 It is useful in keeping track of all the expenses and
maintaining liquid cash to pay off the expenses.
 It helps in expansion of the business by relying less
on external resources of the company.
 It helps the company in assessing their cash position
and in keeping the control over the irrelevant
expenditure.
 It facilitates detailed information in relation to the
quality of an enterprise revenue.
 This statement cannot be manipulated as it reflects the
information of the cash inflows and the outflows.
 It provides for the information of all the sources that
generates cash receipts and the payments for the
organization.
 It helps in evaluating the changes that occurs in the
operating, investing and the financing activities of the
company.
 It assist the management and the users in making the
best possible decisions in terms of financial and
economic aspects.
 Firm by making use of the cash flow statement can
determine its financial structure and the ability of the
corporate in order to adopt the changing conditions
and the opportunities.
 It enables the managers of an entity in making an
effective plan and in attaining the coordination among
the employees.