Window dressing is actions taken to improve the appearance of a company's financial statements. Window dressing is particularly common when a business has a large number of shareholders, so that management can give the appearance of a well-run company to investors who probably do not have much day-to-day contact with the business. It may also be used when a company wants to impress a lender in order to qualify for a loan. If a business is closely held, the owners are usually better informed about company results, so there is no reason for anyone to apply window dressing to the financial statements.
Examples of window dressing are:
- Cash. Postpone paying suppliers, so that the period-end cash balance appears higher than it should be.
- Accounts receivable. Record an unusually low bad debt expense, so that the accounts receivable (and therefore the current ratio) figure looks better than is really the case.
- Fixed assets. Sell off those fixed assets with large amounts of accumulated depreciation associated with them, so the net book value of the remaining assets appears to indicate a relatively new cluster of assets.
- Revenue. Offer customers an early shipment discount, thereby accelerating revenues from a future period into the current period.
- Depreciation. Switch from accelerated to straight-line depreciation in order to reduce the amount of depreciation charged to expense in the current period. The mid-month convention can also be used to further delay expense recognition.
- Expenses. Withhold supplier expenses, so that they are recorded in a later period.
These actions are taken shortly before the end of an accounting period.
The window dressing concept is also used by fund managers, who replace poorly-performing securities with higher-performing ones just before the end of a reporting period, to give the appearance of having a robust set of investments.
The entire concept of window dressing is clearly unethical, since it is misleading. Also, it merely robs results from a future period in order to make the current period look better, so it is extremely short-term in nature.