One Way Enron Manipulated Its Financial Statements Was to Sell

question 56

Multiple Choice

One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while promising 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 cash raised should have been recorded as short-term loans.
• B)The assets should have been listed on the balance sheet as long-term assets.
• C)Cash raised by selling assets should not be recorded as revenue.
• 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:

Net Sales

The total income generated from sales by a firm, after reducing it for returns, discounts, and allowances due to damaged or absent goods.

Inventory Turnover

A proportion indicating the frequency at which a company's stock is sold and replenished during a given timeframe.

Gross Profit Rate

A financial metric that indicates the percentage of revenue that exceeds the cost of goods sold, reflecting a company's operational efficiency.

Accounts Receivable Turnover

A financial metric indicating how many times a company collects its average accounts receivable balance in a period.