Company's window dressing example

Let us look at an example of window dressing used by a company's management. Assume the company has its accounting year ending on Dec. 31, 20X0.

At Dec. 27, 20X0, the balance in the cash account is $2,000. Before the end of the year the company must pay $3,000 for the services it received during the year. Paying this obligation will negatively impact the company's liquidity, so it decides to do some window dressing. The company postpones the payment of $3,000 till Jan. 4, 20X1, by negotiating the payment terms with the vendor. The company also decides to sell a fixed asset for $4,000 cash. Refer to the extract of the balance sheet below to see how these two actions of window dressing impacted the company's financial position:

ABC Company

Extract of Balance Sheet as of Dec. 31, 20X0

WITHOUT

Applying window

dressing

AFTER

Applying window

dressing

Assets

Current assets:

Cash and cash equivalents

(1,000)

6,000

Accounts receivable

5,000

5,000

Inventories

9,000

9,000

Total current assets

13,000

20,000