Part A: Financial statement of Enron Company.
Introduction
The success of every company depends on its financial progress. Financial statements are vital in staging and determining the growth of the company. Enron has witnessed fast and effective growth because it managed its financial quo (Abdel-Khalik, 2019). They are destined on two significant aspects that are knowledge and skills. They use knowledge to coordinate their issues well and run the entire company. Skills are essential in developing an excellent approach to managing the financial problems that can see an efficient growth of the company. The company deals with the energy sector, and they are targeting to maintain its lead in this entire sector (Abdel-Khalik, 2019).
Important issues that need to be known about financial statements.
Stock investors must have the ability to interpret the statistics in Enron company financial statements. Intelligent investment decisions are predicated on interpreting and analyzing balance sheets, various income statements, and essential cash flow statements to determine an Enron company’s investment qualities (Palepu et al., 2020). However, the heterogeneity of financial information necessitates that we somehow familiarize ourselves with key financial statement features before concentrating on the financial statements of specific corporations. This essay will demonstrate the benefits of financial statements and various ways of using them to benefit the Eron company.
Financial Statement Scorecard
There are thousands of amateur investors globally, and although a significant proportion of them have selected mutual fund schemes as their preferred investment vehicle, several others invest directly in inequities. Prudent investment standards require us to search out reputable companies with solid balance sheets, substantial profitability, and positive cash flows. The Enron energy company provides a reasonable opportunity to stress financial success (Palepu et al., 2020).
Useful Financial Statements
Balance sheets, numerous income statements, and statements of cash flow are the income reports used in investment analysis, together with examining Enron company’s investors’ equity and dividend payments. Even though the company’s balance sheet typically attracts the most interest from investors and auditors, it is crucial to include the cash flow report in the study of the Eron company financial statements (Amiram et al., 2018).
Diversity in Reporting
Financial statements cannot be expected to conform to a standard format. Numerous pieces of literature on the analysis of financial statements adopt a blanket approach. Inexperienced investors could become confused when confronted with a display of accounts that deviates from the norm for a “normal” company. Please keep in mind that the variety of business activities leads to various financial statement formats (Amiram et al., 2018). This is especially true for the balance sheet, but the financial report and cash flows are less sensitive to this issue.
Compresence of Financial Jargon
Lack of significant consistency of financial statement terminology affects the comprehension of numerous account entries in financial statements. This situation can be perplexing for novice investors. There is a minimal prospect that this situation will alter shortly, but a decent financial lexicon can greatly assist (Weygandt et al., 2018).
Non-monetary Information
Indirectly represented in the Enron company’s financial statements include the status of the economy, the business, competitive factors, market pressures, changes in technology, the management quality, and the personnel. Investors must appreciate that company’s financial insights are only one, albeit crucial, component of the broader investing puzzle (Weygandt et al., 2018).
The things that should be known about Enron’s financial statement.
The first is revenues. This is the income from the company. It determines the expenses of the company. In 2001, the company made a revenue of $50,129. Notably, these were used to run all the company’s activities (Roychowdhury et al., 2019). Revenues are essential in staging the next course of action for the company. Little revenue ensures the slow growth of an organization. Enron company is a fast-moving organization that has to create more revenue that can facilitate a number of its daily activities and heighten its financial issues.
Secondly is cost and expenses. The company has different prices for gas expenditure, electricity bills, and other valuable products. However, it costs the company $48,159 in the year 2001. The operating expenses totaled $ 993 (Roychowdhury et al., 2019). Taxes also plays a critical part in costs. The company pays up to $88 to facilitate law enforcement on taxation. The third is operating income. These are the various accounting figures that show the profit made by the company after deducting all the possible expenses made. In the year 2001, Enron company’s operating costs were drawn from the following areas; numerous deductions, earnings from the equity sector, selling of various non-merchant commodities, various interests, and dividends (Roychowdhury et al., 2019). Below are the standings of multiple operations made by the company in 2001.
The financial statement also stipulates various issues on the assets of the company. The Enron energy company owns different assets. They include cash equivalents, inventories, deposits and properties, investments, and various accounts. Their quoted price in the year 2001 are as follows (Petra & Spieler, 2020);
Financial statement analysis
Information about extra cash flows
The net money paid for taxable income during the first quarter of 2001 amounted to $100 million. Funds paid for credit on the same period’s net of sums capitalized, $200 million. Enron and Azurix reached a deal in 2000 under the terms of which owners of Azurix’s nearly 39 million $8.375 would be paid in cash for publicly traded shares a transaction for each share (Petra, & Spieler, 2020). On March 16, 2001, Azurix Investors accepted the proposal that Enron would pay around $330 million for an equal amount of the public shares, and Azurix Corp repaid all public company’s shares. The two companies also made non-cash Transactions. Enron obtained a limited partnership in March 2001 in an unconsolidated equity joint venture, Joint Resource Development Ventures Limited Partnership, for $35,000,000 (Negangard, & Fay, 2020). The result from the JEDI has been integrated due to its acquisition.
JEDI’s stability sheet comprised net assets as of the acquisition date of around $500 million, which included an expenditure of $12 million gets to share Enron common shares at an estimated $785 million in merchant interests, and other assets are held by around $670 million in third-party debt and debt. Roughly $950 million were owing to Enron. Enron paid back. About $620 million was owed to third parties previous to the acquisition. In terms of liabilities, the company made significant expenses and revenue quest as follows (Negangard & Fay, 2020);
The Enron company’s financial stability has been heightening since 1995. They have made relevant progress as far as revenue is concerned. This sentiment is supported by the following table (Jones & Stanton, 2021);
Profitability
Profitability ratios are the classes of financial indicators used to evaluate a company’s ability to create earnings over time compared to its profits, operating expenses, financial statement assets, or investors’ equity utilizing statistics from a single moment. Profitability ratios could be contrasted to productivity ratios, which measure how effectively a corporation utilizes its internal efficiency to increase income. Enron company has made significant steps to facilitate profitability essence within its space (Jones & Stanton, 2021). The following figures compare the net revenue for 2001 and 2000 which depicts the importance of profitability.
Various profit margins, comprising gross margin, some operating margin, the pretax margin, as well as net profit, are being used to assess Eron company’s profitability across various price categories of inquiry. As extra costs like COGS, capital expenditures, and levies are accounted for, the margins diminish (Jones & Stanton, 2021).
Cash flow
Cash flow is the net sum of the ratio that measures the amount and essence of cash transfer in a company (Haswell, & Evans, 2018). The cash received constitutes inflows, while the money spent symbolizes outflows. The ability of a company to create sufficient cash flow and, more particularly, to optimize protracted operating cash flow is essential to its potential to build shareholder value. However, this is the cash created by a firm’s commercial operations after deducting the amount paid on capital expenditures. The following are the Eron company’s electricity cash flow for 2000 and 2001(Haswell, & Evans, 2018).
Liquidity
Liquidity is the convenience that an asset or property can be changed into readily available cash without impacting its sale price (Rashid et al., 2018). Money is the main asset, whereas physical assets become less liquid. The two most important forms of liquidity are trade liquidity as well as accounting liquidity—the Enron company sold some of its assets to acquire revenue, which is vital in its daily operations. The property of the Eron company can act as important security in staging or negotiating financial issues with different partners or firms (Rashid et al., 2018).
Solvency
Solvency risk tends to be the possibility that a company may not be able to satisfy its financial commitments when they become due, even if its assets are sold. Incapable of paying its debts, and entirely destitute company will be pushed into bankruptcy. Below are the solvency rates of Enron company in 2000 and 2001. It depicts loss creation due to various shares (Thi & Thi, 2022).
Business model
The model indicates more concoctions on natural gas as an essential resource quested in the Eron company. The model ensures effective and efficient cash flows. It also creates an element of solving the instances of solvency. Another critical issue is that it eases the trading codes of the company and ensures good contact between the producer and consumer. The Enron company makes several profits by selling gas energy (Abdel-Khalik, 2019).
Part B: Enron Bankruptcy
When a company cannot meet its financial responsibilities or make payments to its debts, it declares bankruptcy. All of the Enron company’s outstanding obligations are tallied and, if not paid in full, are repaid from the firm’s assets based on a petition filed with the court. The company’s bankruptcy filing is the legal action it takes to be released from its debts (Mohd Ali, 2020). The proprietors are absolved of any unpaid debts owed to creditors. The bankruptcy procedure commences with a complaint filed first by the debtor, that is the most usual scenario, or in favor of lenders, and is less often.
Most of the firm’s assets are evaluated and recorded, and some of the assets can also be used to satisfy the debt. Enron declared bankruptcy in late November after an energy business, Dynegy, withdrew an $8.4 billion acquisition (Mohd Ali, 2020). By the end of the following year, the fall of Enron had cost owners tens of billions, eliminated approximately 5,600 jobs, and terminated nearly $2.1 billion worth of pension plans. Batson determines that Enron misrepresented its profits by almost $1.5 billion and undervalued its debt by over $828 million by informing shareholders that it had “sold” properties at a premium when, in reality, it had lent against assets through an associated partnership (Abdel-Khalik, 2019).
Economic events that led to Enron’s Bankruptcy
Enron Corp.’s history illustrates a corporation that saw a remarkable ascent followed by a dizzying decline. Its demise touched thousands of workers and rattled Wall Street towards its foundations. Before filing for bankruptcy on December 2, 2001, Enron’s assets were selling for $0.26 per share, compared to $90.75 at the company’s height (Abdel-Khalik, 2019). Until now, many are perplexed as to how such a formidable organization — at the time, another of the largest corporations in the United States — could have imploded so rapidly. How its management was able to deceive investigators for an extended period with fictitious assets and off-the-books accountancy is also puzzling. The chart below shows Enron’s revenue compared to other companies in the year 2000 (Noorullah, 2020).
The first economic event was Blockbuster’s role. Blockbuster, the famous video rental giant, was among innocent participants in the Enron debacle. Enron Broadband Providers and Blockbuster formed a collaboration to access the expanding video on demand scale market in July 2000. Enron began recording forecasted earnings depending on the anticipated expansion of the VOD industry, which greatly exaggerated the figures. EOL executed about $350 billion in deals by the middle of 2000 (Noorullah, 2020). Enron planned to construct elevated broadband network infrastructure as the dot-com boom began to deflate. This endeavor cost the corporation vast amounts of money yet yielded virtually little profit. Enron had substantial exposure to the market’s riskiest segments when the crisis arrived in 2000. As a result, numerous investors and debtors found themselves mostly on the brink of losing a market valuation decline.
Secondly, wall street crumbles. Enron began to self-implode even by the fall of 2000. Employing MTM financial reporting, Skill disguised the trade businesses and the firm’s other activities’ financial losses (Marić & Parnicki, 2021). 10 This method calculates the value of the share depending on the current market price, as opposed to its valuation. This can be effective in trading securities but can be terrible for genuine enterprises. In the instance of Enron, the firm would construct a resource, including a power plant, as well as instantly claim the predicted profitability on its books, despite not having earned a single cent from the property. If the power plant’s revenue were less than anticipated, the corporation would move the property to an off-balance-sheet organization, where the deficit would not be recognized. This method of accounting allowed Enron to write off unproductive endeavors without affecting its bottom line. MTM led to strategies meant to conceal the firm’s losses and make it appear more prosperous than it was.
Andrew Fastow, a prominent figure who was named chief operating officer in the year 1998, devised a strategic plan to demonstrate the company’s strong financial condition even though several of its businesses were losing revenue (Marić & Parnicki, 2021). Lastly is solvency. In 2001, the company experienced more solvency rates which slowed down its profit margins. The rates emerged due to the cheap sale of various companies’ assets. The investors predicted the bankruptcy of the Enron company. Much of Enron’s prosperity proved to be an illusion in the end. The firm used a variety of related corporate companies and accounting tricks to disguise enormous business deficits and substantial debt. These strategies eventually failed, and in October 2001, Enron disclosed a massive operating loss and admitted that the company had consistently exaggerated its profitability for at least four years. In November of that year, utility rival Dynegy considered acquiring Enron, but when Dynegy canceled the proposed merger the following month, Enron had no alternative but to declare Chapter 11 bankruptcy (Noorullah, 2020).
It subjected the investors to various lessons as follows; From the Enron scandal, investors can still draw numerous crucial studies. First, it is essential not to be too much of your economic activity in a single security. If you have enough capital invested in a firm, the risk of an unexpected reversal might wipe you out, regardless of how engaging the firm’s story may be. Second, employees should be cautious when purchasing corporate stock (Noorullah, 2020). It’s enticing to venture into a firm you’re familiar with. If something goes wrong, you face losing your principal source of revenue and suffering significant damage to your equity investment. Ensure that you comprehend how a firm’s business operates. Most stockholders did not learn about Enron’s complex trading account, but they did not care if the company kept rising. This rendered them entirely susceptible to fluctuations in the essential health of Enron’s operational business.
Enron warned individuals who were prepared to listen, and investors could have spared a portion of the scandal’s harm if they had avoided the company (Abdel-Khalik, 2019). The following are the actions that the company would have taken to hold off bankruptcy. The first is strengthening the oversight techniques of the board. Some members are destined to embezzle the funds of the firm. They should be well-checked and cautioned. Secondly is by preventing perverse financial credits. However, this will avoid the unplanned use of capital. Lastly is installing ethical discipline in various business organizations (Abdel-Khalik, 2019).
References
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Amiram, D., Bozanic, Z., Cox, J. D., Dupont, Q., Karpoff, J. M., & Sloan, R. (2018). Financial reporting fraud and other forms of misconduct: a multidisciplinary review of the literature. Review of Accounting Studies, 23(2), 732-783.
Haswell, S., & Evans, E. (2018). Enron, fair value accounting, and financial crises: a concise history. Accounting, Auditing & Accountability Journal.
Jones, M., & Stanton, P. (2021). Negative accounting stereotype: Enron cartoons. Accounting History, 26(1), 35-60.
Marić, D., & Parnicki, P. P. (2021). Audit Analysis of Enron Electric Power Corporation Through the Prism of Marketing (Non) Ethics. KULTURA POLISA, 18(45), 335-345.
Mohd Ali, B. (2020). Reviewing Enron Scandal.
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