Question

a) What is creative accounting? b)Why do you think that it might clash with the idea that the financial statements should give a 'true and fair view' of the accounts? c)Does creative accounting represent the unacceptable face of accounting flexibility?

Answer 1

ANSWER-

a) Creative accounting is a type of accounting in which the accountant try to use their knowledge of accounting rules and standards to manipulate the figures reported in financial statements. Creative accounting is used to show financial statements better than the real financial statements i.e the accountant use agrresive accounting techniques in order to show high earnings,better performance, inflate profit figures, window dressing etc.

b) As per Accounting principles,rules and regulations and standards. Accounting informations and Financial statements must be accurate, reliabe and give true and fair view because these financial statements and information has many uses in the business organisation as these statements helps management to take better decisions for the future. These financial statements works as evidence or proof for the auditors, creditors and for many Internal and external users of the organisation.

On the other hand, Creative Accounting is a type of accounting in which accountant uses the advantages of loopholes between the Accounting rules and choice of measurement and disclosure practices by which, they show what they wanted to, they show inflated profits, high earnings in financial statements. In this way, the true and fair view of accounts in financial statements get effected by showing manipulated figures, high profits to the users of information. Because of this, we think that it will clash with the idea that the financial statements should give a'true and fair view' of the accounts.

c) Yes, Creative Accounting do represent the unacceptable face of accounting flexibility by showing manipulated figures, high earnings in financial statements by which the users of information get wrong information. As per Accounting principles, it is stated that the financial statements of the organisation must be accurate, reliable and trustworthy. But in Creative accounting, it gives manipulated information or we can say better than the real information which effects the management decisions as it takes decisions on the basis of manipulated information given by the accountant using creative accounting and this decisions are not effective for the organisation as it will not give that much flexibility to grab the opportunities by these decisions. In this way, it represents the unacceptable face of accounting flexibility.