Creative Accounting - A Preview...

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Imagine there's a Farmer. He's very poor, and only has a Cow as his asset. He's also got a terminally ill son. Now, he's shown his son to the best doctors in town, and all of them are unanimous in their prediction: The son does not have many more days to live.

Never one to give up, the Farmer prays to GOD

"Dear God. Please save my Son. If my son's saved, then I'll sell my only Cow to a third party and donate the entire sales from the cow to you (organization)."

GOD is mighty pleased, and indeed, saves the Farmers Son. The Farmer, as expected, is delighted. He's elated at this son's recovery. But now, he's in a dilemma. He's really poor, and depends on his only cow for survival, and now, as per his promise to GOD, he has to sell the cow, and donate the money.

What would you do if you were the farmer?
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This is what the Farmer did...

The Farmer takes the cow to the market and announces that he's willing to sell the cow for Rs 2. Now, hearing this, a huge crowd gathers around him. (The current market price of a cow is Rs5000.)

But now, the Farmer says that he'll only sell the cow if the buyer also buys a Parrot along with the cow for Rs 5050. The parrot was probably caught on the way to the Market. (The current market price of the parrot is Rs100).

Hearing this, the crowd trickles out, but one buyer remains. All said and done, if he were willing to buy the combo, he'd get the Cow and Parrot for Rs5052 instead of Rs5100. So the deal is struck.

The farmer gets the money Rs5052, and pays Rs2 (sale price of the Cow as agreed) to GOD, and keeps the rest.

And he's kept his promise.
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Welcome to Creative Accounting, one of the courses taught at XLRI.
The story above was told to us by our Finance Professor - S . Sengupta.