Making Attractive Financial Statements And Ratios Essay

Making Attractive Financial Statements And Ratios Essay

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a. In an attempt to produce attractive financial statements and ratios to interested parties such as prospective/current investors and lenders, a company can engage in many window-dressing techniques designed to both generate profits and reduce their liabilities (Subramanyam, 2014). First and foremost, a company can simultaneously advance their collections of accounts receivable, defer their cash payment or purchases, and shrink their regular inventory levels (Subramanyam, 2014; Accounting Tools, 2016). Consequently, these methods are intended to increase their amount of cash and cash equivalents needed to enhance both the numerator (grow current assets) and denominator (lower current liabilities) in their liquidity ratios (Subramanyam, 2014). Additionally, by switching from accelerated to straight-line depreciation, a company can reduce the amount of depreciation expense in the present time period and increase the perceived value of their assets (Accounting Tools, 2016).
b. By applying interim analysis instead of relying on annual data, one can identify abnormalities and assess the quality of a company’s financials towards the end of a period, which helps determine whether or not a manager is window-dressing (manipulating) their financial statements (Subramanyam, 2014). More specifically, one can examine the company’s accounts receivable, current liabilities, and inventory liquidity measures to detect specific unethical actions (Subramanyam, 2014). For example, a company may offer incentives or discounts to customers for early payment or acceptance of goods/services, which can accelerate both the accounts receivable turnover and days’ sales in receivable measures for that period (Accounting Tools, 2016; Subramanyam, 2014). Subra...

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...and operating cash flow to compensate for their fixed charges and preferred dividends. As a result, Kimberly Corporation is producing $8.71 and $3.98, respectively, to every one dollar of fixed charges and preferred dividends. Similarly, the company is creating $10.57 of pre-taxed cash from their operations to every one dollar devoted to fixed charges. These values are favorable for investors when evaluating both the company’s liquidity and solvency, which highlights their encouraging short-term and long-term growth potential as well as their ability to meet their interest and dividend payments (Subramanyam, 2014). Moreover, since Subramanyam (2014) states there is a distinct correlation between higher coverage values and lower default risks, creditors can classify the Kimberly Corporation as low-risk and possessing a large borrowing capacity (Subramanyam, 2014).  

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