Quiz 7: Enron and the Tale of the Golden Goose
Overstatement of Earnings The company E overstated its earnings through related party transactions on sales and related party loans camouflaged as company's sales. It continuously understated company's debt. The company used off-balance sheet. Answer: T Justification: From the above explanation, it is very clear that the company has overstated the earnings and used off-balance sheet. Hence, the given statement is True. Thus, the correct answer is .
Put option Put option is an option, that permits the holder, the right to sell an underlying asset without any compulsion. Justification: • Company E used LJM1 (SPE)to produce a false put option hedge for its investment in Company R Net Connections. Put option from an off-balance sheet entity is preferred by Company E to validate the revaluation of an investment. • Company E purchased 5.4million shares of Company R in March 1998 at $1.85per share. During April 1999, Company R went public and its value increased to $21 per share. On May 1999, Company E's value of investment becomes $300million. • Internet companies face wide fluctuations in the share market; as a result it becomes very difficult to evaluate the worth of stock. Hence, GAAP (Generally Accepted Accounting Principle)does not permit any company to recognize the profit from such stock until it is saleable. The above explanation is matching with given statement. Hence, the statement is true. Therefore, the correct option is . Note: SPE (Special Purpose Entity)is named as LJM1.