Why Creative Accounting?
Firms often experience fast growth during their early years. During these heady times, everybody involved assumes that the strong growth will continue indefinitely and the stock price invariably reflects those expectations. But eventually the firm begins to saturate its market and the growth rate falters. Since a growth slowdown will sink the share price, some managers resort to creative measures to mask the falloff. For instance, they may encourage customers to order unneeded products by offering longer payment terms (e.g. one-year instead of the usual 60 days), a practice known as channel stuffing. Another way to stimulate demand is to cut prices. Of course reducing prices without corresponding cost savings decreases profit margins and hence earnings. But that result can be masked by inflating inventory dollar values, which increases margins. These high jinks leave tracks. Channel stuffing increases accounts receivable (monies owed by customers) levels since customers are taking long
