One Way Enron Manipulated Its Financial Statements Was to Sell

question 95

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 off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.
• D) Both B and C are deceptive.

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Definitions:

Annual Dividend

The total amount of money paid to shareholders from a company's profits over the course of a year per share of stock.

Floatation Costs

Expenses incurred by a company in issuing new securities, including underwriting fees and legal and administrative fees.

Cost of Retained Earnings

The rate of return that shareholders expect on the earnings that a company keeps and reinvests in its operations.

Risk Premium

The extra return expected by an investor for holding a risky asset rather than a risk-free asset.