ACCA Applied Skills · Financial Reporting · Limitations of financial statements
Which of the following is the best description of 'window dressing' as a limitation of financial statements?
Window dressing means arranging transactions around the reporting date so the statement of financial position looks better than the true underlying position, for example temporarily improving cash or reducing debt. Smoothing profits with provisions is a different practice called income smoothing.
- AArranging transactions around the reporting date so that the statement of financial position looks more favourable than the underlying positionCorrect
- BApplying a different depreciation method each year to match profit to forecasts
- CSpreading reported profit evenly across periods by creating and releasing provisions
- DPresenting gains in other comprehensive income rather than in profit or loss
Explanation
Window dressing involves timing transactions, such as repaying a loan just before year end and reborrowing afterwards, so that reported position or ratios look better at the reporting date. Spreading profit across periods is income smoothing, not window dressing. Changing depreciation methods each year is also not permitted without justification.
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