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Illustrate the steps of Creative accounting
Creative accounting include:
1 Timing of transactions. Delaying or hurrying up the despatch of invoices at the yearend to decrease or increase sales. This will aid in profit smoothing which listed companies may employ. Early recognition of revenue would also smooth profits.
2 Choice of accounting policies may not reflect the true substance of transactions. Even though these areas of abuse have been identified in accounting standards and abuse of things like setting up provisions are now not possible.
3 Capitalising of expenses as non-current assets. This will result in increased profits. WorldCom did this type of creating accounting which amounted to billions of dollars being capitalised.
4 Off balance sheet finance. This is where company undertakes though excludes it from the statement of financial position. A good illustration is using special purpose entities to house the liabilities, which company doesn't own. This would then exclude them from consolidation so users of the accounts are unaware of the debt. Enron engaged in this type of creative accounting. This has now been rectified with accounting standards for reporting substance over form.
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