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Accounting and Finance Essay Example

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Accounting and Finance

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This therefore enables them to boost their assets in order to avoid take-over which may result due to bad performance. Companies that make losses therefore seek to maximize the loss reported in that year so that their future years may appear better (Griffiths, 1987, pg.The desire for tax benefits necessitates companies to use creative accounting particularly when the taxable income is measured through accounting numbers. Further, the companies desire to meet external expectations such as long term survival demanded by customers and employees, assurance about payment demanded by suppliers and dividend payout pattern to the analysts, and internal targets such as sales targets and profitability. Both of these require the company to cook their books through creative accounting (Epstein & Lee, 2010, pg.Companies use different methods to manipulate the values in their financials. The most common methods include pre-acquisition write down, extraordinary and exceptional items, deferred consideration on acquisition, changes in depreciation method, off balance sheet finance, brand accounting like capitalization of assets, contingent liabilities, capitalization of costs (R&D and interest), currency mismatching between deposition and borrowing and use of pension funds to reduce annual charge among others (Aneirin, 2007, pg.b) Companies basically would wish to succeed in their business endeavors as well as possible. Generally Acceptable Accounting Principles of creative accounting outlines various accounting methods to be selected by companies specifically those that may make their financial statements better. The method provides for legitimate techniques to be employed especially when certain items in the accounts are being computed (Picker, 2013, pg. However, a wide range of accounting methods provided by the GAAPS of creative accounting poses a difficulty in drawing an ethical line. Technically, the estimates employed by the companies are not illegal but gross misrepresentation and inflation of the performance of the true values may be unethical. Creative accounting is therefore legalized impliedly especially when it achieves the ultimate goals of the company of increasing the value of the stock and also within the ramifications of the law. It should therefore not mislead other users or stakeholders and should also benefit the company

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