Discussion Case Enron: In order to understand Enron’s financial statements, one must first understand two areas of the company’s business.

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Discussion Case
Enron
On December 2, 2001 Enron Corporation filed for bankruptcy and shocked the financial world.
Enron was the seventh largest company (by revenue) in the United States. How could this high
profile company have failed? A number of articles and books have profiled the company’s
aggressive personnel policies where every year they “weeded out” a bottom tier of employees.
There have been significant discussions of Enron’s use of special purpose entities and “off balance
sheet” debt (however, there has been little discussion of off balance sheet assets). Other topics
include Enron’s use of “mark-to-market” accounting and other transactions designed to simply
allow Enron to hit targets so that managers could earn their bonuses. Some of these transactions
involved collusion with Enron’s lenders. Early in 2002, Congress, the SEC, the Justice
Department, and the press were all investigating this case for evidence of wrongdoing. You will
find a number of articles in business and news magazines from mid December 2001 through
March 2002 with substantial details about the Enron collapse. However, there is a significant
aspect of the story that is not told. Few have discussed what could have been learned
from Enron’s financial statements.
Required:
Prior to coming to class, address the following questions based on your evaluation of Enron’s
financial statements for the years 1999 and 2000 (available on the class website). An Excel
spreadsheet with Enron financial data is also available on the class website under the filename
“Discussion Case – Enron (Data)” as is the Commonly Used Ratios under the filename “Discussion
Case – Enron (Ratios).”
Problem 1: Company
1a. What was Enron’s business? Please answer in one-half page or less.
1b. In order to understand Enron’s financial statements, one must first understand two areas of
the company’s business. Please respond to the following questions using Enron’s financial
statements.
 What were “Price Risk Management Activities”?
 What were “Merchant Assets and Investments”?
1c. How was Enron able to double revenues from 1999 to 2000? Please respond in one-half page
or less?
Problem 2: Information for various ratios
Using an Excel spreadsheet:
2a. Show how you calculate net income to common shareholders (i.e. net income less minority
interest and preferred dividends) for Enron Corporation for the year ended December 31,
2000. Include any adjustments for earnings quality.
Explain any assumptions you made in answering the question here.
Assumptions made in calculating net income to common shareholders for the year ended:
Year ended Dec 31,
2000
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2b. Show how you calculate sustainable operating cash flow for Enron Corporation for the year
ended December 31, 2000.
Explain any important assumptions you made in answering the question here.
Assumptions made in calculating sustainable operating cash flow for the year ended:
Year ended Dec 31,
2000
2c. Calculate the Commonly Used Ratios for Enron Corporation for the years ended December 31,
2000 and December 31, 1999. Note: For profitability ratios, first adjust for earnings quality
issues. Use sustainable cash flow from operations (as computed in 2b.) for cash flow from
operations is all applicable ratios.
Problem 3: Liquidity Risk
3. Identify other financial resources (i.e. other than assets, etc.) at Enron’s disposal and indicate
the relevance of these resources to Enron’s liquidity as of December 31, 2000. Address any
concerns about off balance sheet obligations that will need to be met during the upcoming
year. Also address any guarantees that Enron may be contingently liable for.