One Way Enron Manipulated Its Financial Statements Was to Sell

question 5

Multiple Choice

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?

• A)The assets should have been listed on the balance sheet as long-term assets.
• B)Cash raised by selling assets should not be recorded as revenue.
• C)The cash raised should have been recorded as short-term loans.
• D)The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A)or notes to the financial statement.

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Definitions:

Constant Returns to Scale

A situation in production where increasing all inputs by a certain factor results in output increasing by the same factor, indicating proportionate scalability.

AP

Advance Placement; a program in the United States and Canada offering college-level curriculum and examinations to high school students.

Economies of Scale

The cost advantages that enterprises obtain due to their scale of operation, with cost per unit of output generally decreasing with increasing scale.

Diseconomies of Scale

The situation where a company or business grows so large that the costs per unit increase, leading to inefficiency.