Why Might The Enron Collapse Make A Good Play Accounting Essay


Question 10:

Prepare a business report (as if for senior management) on two of the following. Use the Internet as a resource. Length about 200-300 words each excluding any appendices. Use correct referencing and include a bibliography.

a. Digital Dashboards. Include in your report definitions, types, history, benefits, disadvantages, and screenshots of examples and an explanation of how dashboards could be used to demonstrate corporate social responsibility.


b. Bounded rationality in decision making.


c. Critically evaluate 'predictably irrational' (Dan Ariely)


d. Why might the Enron collapse make a good play) (Google Enron - the Play)

Question 1:


Formula view:

In this exercise, we don't know exactly how $78,000 in transaction (a) was paid. In this case, we assumed that this money is account payable. If it is paid by cash, the operating income for Cash basic would be $56,800 - $78,000 = $-21,200, a loss of $21,200.


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From my view, the accrual basis should be considered as the measure of Dr. Sanchez's performance in 20X1. Because it includes all assets and liabilities appearing in all transactions, while the cash basis contains only cash which was used in this year. So the accrual basis can reflect the efficiency of Dr. Sanchez's business more exactly than the cash basic. For example, in transaction (d), $20,000 fee billed have been earned and we can only see this money in the accrual basis but not in the cash basis.

The government usually uses accrual basis for the income tax purpose in companies. In case the government uses cash basic, it will be better for the companies in which cash basic is less than accrual basic. Normally these companies have small business and different purposes.

Question 2:

15-1, 15-3, 15-4, 15-13, 15-16


The income statement (also called a profit and loss statement) answers questions about company's financial performance during a period of time. The income statement provides information about a company's profit or loss.

The balance sheet (or a state of financial position) answers questions about business' financial status at a specific moment in time. A balance sheet encompasses assets, liabilities, and owners' or stockholders' equity.


A company's income statement shows the profit or loss over a span of time, while balance sheet is a snapshot of the financial status at an instant of time. Therefore, the income statement is the major link between balance sheets. In addition, the income statement = cash flow statement + balance sheet.


"Net income is the difference in the ownership capital account balances at two points in time". This statement is erroneous because net income is the excess of revenues over expenses. There are other factors which affect the ownership capital account but not the net income, such as dividends or ownership investment.


"Dividends are distribution of profits". This statement is not really exactly. Although profitable operations create the ability to pay dividends, dividends are distributions of assets to stockholders.


Ethics and integrity are important to accountants because they are the authentication of the accounting profession. Accountants have to make users rely on their information. Moreover, confidence in financial statements depends on the competence and integrity of accountants and auditors.

Question 3:


Formula View

Question 4:


Formula View:


$10,895.1 - $315.1 - $1,057.4 - $2,661.6 - $6,141.3 = $719.7

Total Stockholders' equity:

$173.2 + $1,995.8 = $ 2,169.0

(c) Total liabilities:

$2,317.8 + $681.7 + $4,507.0 + $1,219.6= $8,726.1


$10,895.1 - $2,169.0 = $8,726.1

Question 5:


"Accumulated depreciation is a sum of cash being accumulated for the replacement of fixed assets". I think this statement is not quite exactly. Depreciation is an allocation of an historical cost to expense (Horngren, 2008, p754). Accumulated depreciation amount expresses only the expired value of an asset and it is not cash or any other variety of assets that can be used to buy another asset.


"To capitalize an amount spent means that it will not be charged as an expense". I don't agree with this statement. "To capitalize an amount means to record it as an asset rather as an expense" (Horngren, 2008, p732). Therefore it will not be instantly charged as an expense but it will be charged as an expense when capitalized asset is used.


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"Goodwill may have nothing to do with the personality of the manager or employees". I agree with this statement. According to Horngren (2008, p733), "goodwill is the excess of the cost of an acquired company over the sum of the fair market values of it identifiable individual assets less its liabilities".


The statement of cash flows illustrates changes in cash receipts and cash payments of an organization during a period. This statement shows the relationship of net income to changes in cash balances. Moreover, it reports pas cash flows in order to predict future cash flows, evaluate management's generation and use of cash and determine whether company can pay interest, dividends and debts on time (Horngren, 2008, p740).


"Depreciation is an integral part of a statement of cash flows." I do not agree with this statement. Depreciation is added to net income to compute cash flow but it does not affect cash and it does not entail a current outflow of cash (Horngren, 2008, p754).

Question 6:


Formula View

Question 7:

What went wrong at One Tel?

One Tel failed because of an expensive mistake, they failed to manage receivables and liabilities. They spent too much time on promoting and expanding One Tel but not enough time concentrating on operation of the business system. In 2000, One Tel spent $525.6 million on purchasing Australia spectrum license in order to expand their network and take the market from Optus. However there was a problem with their system so they could not sell this network at its real value, and it did not make profit. One Tel was cleared bank draft in 2001.

What are the major financial reports?

The major financial reports are:

- Statement of finance performance

- Statement of finance position

- Statement of cash flow.

- Independent Audit Report.

3. Why are profits important? Why is cash flow important?

Profits are important because the role of capitalist economy is to make a profit or go out of business. Profits show how a company operates effectively and profitably as well as the return of investment.

Cash flow is important because it is one of the most primary reasons which make the business fails. If companies want to improve their business and profits, they have to ensure precise cash flow to make right financial plans.

4. How did One Tel show a positive cash balance?

One Tel showed a positive cash balance by the reward on sale volume. By promoting the marketing, One Tel wanted customers to use more profitable services One Tel offered them.

5. What are the characteristics of a good internal control system?

According to the COSO (Committee of Sponsoring Organizations of the Treadway Commission), internal control can be defined as "a process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations." (Internal Control-Integrated Framework, Executive Summary, 1992)

The characteristics of a good control system consists five fundamental components:

The Control Environment: the most important one because if sets the tone for the organization, and contributes the regulation and structure for the other components.

Risk Assessment: used to identify, analyse and manage relevant risks to the achievement of objectives.

Information and Communication: used to identify, capture, and exchange financial, operational, and compliance information in a timely manner in order to enable people to carry out their responsibilities.

Control Activities: included policies and procedures that make sure management directives are implemented.

Monitoring-processes: used to evaluate the quality of internal control performance over time. (Internal Control-Integrated Framework, Executive Summary, 1992)

Question 8:


"It is better to recognize goodwill than to write up assets to their fair market values". In a consolidated statement, we have to write up assets to their fair market values at the time of the acquisition. However if it is possible, recognizing goodwill can reduce the depreciation of the individual assets.


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The two ratios which are multiplied together to give the pretax operating rate of return on average total assets are operating income percentage on sales and total asset turnover.

The pretax operating rate of return on average total assets = operating income percentage on sales * total asset turnover.


"If IBM had been forced to expense (the software development cost of) $785 million, its earnings would have been cut by 72 cents a share. With IBM selling at 14 times earning, expensing the cost might have knocked over $10 off IBM's share price." The quotation assumes that the ratio of price earnings is fixed. If the software development cost of $785 million, it means that there was a decrease in net income about $785 million, so the earnings per share was cut by 72 cents. Price earning ratio is calculated by the market price per share / earnings per share. IBM price earning ratio is stable at 14 times and the earnings per share was cut by 72 cents are the reasons why the IBM's share price reduced $10.


Suppose the president of your company wanted to switch depreciation methods to increase reported net income: "Our stock price is 10% below what I think it should be; changing depreciation method will increase income by 10%, thus getting our share price up to its proper level". From my view, changing the depreciation methods is not a good way. It can make income increase but it will create a wrong value of the assets in the future. Moreover, we can not be sure that increasing reported net income will make the stock price to rise, because the stock market does not totally depend on the reported net income.

Question 9:


Formula View

Question 10:

Digital dashboards

Executive Summary

This report provides details about digital dashboards, includes the definition, types, history, benefits and disadvantages of digital dashboards. In addition, it gives an example of digital dashboards screenshot as well as how dashboards could be used to demonstrate corporate social responsibility.


Digital dashboards play an important role in management information system as they are very useful to determine the departmental performance of a company.


A dashboard is described as an executive information system which is easy to be read. Digital dashboards can be known as"real time visualisation tools of critical business indicators that help in decision making" (Dürsteler, 2004). They are the management of all data base within an organization, so they can measure the departmental performance.


There are three main types of digital dashboards: stand alone software applications, web-browser based applications, and desktop applications.


The idea of digital dashboards was based on the study of decision support systems in 1970s. However, digital dashboards were appeared in the late of 1990s, with the surge of the web. Digital dashboard is one part of Digital Nervous System concept which was developed by Microsoft in the same this period of time (From Wikipedia - Dashboards).


There are many benefits of digital dashboards as they help managers control the varied departments in their companies. These are the other functions of digital dashboards:

- Visual presentation of performance measures

- Identify and correct negative trends

- Measure efficiencies/inefficiencies

- Generate detailed reports showing new trends

- Make decisions based on business intelligence

- Align strategies and organizational goals

- Save time over running multiple reports

- Gain total visibility of all systems instantly

(From Wikipedia - Dashboards)


Digital dashboards measure the performance based on input data of companies. Therefore, if the data is not exactly, there will be a bad result in the measurement of digital dashboards and it will make a bad decision.

Companies have to spend money to maintain their information system in order to ensure that digital dashboards can collect available data from all departments.


As we can see, this is the screen shot of digital dashboards, which illustrates the daily sales of an organization in October 2003. We can see the amount of daily units sold as well as the daily shipments (Dürsteler, 2004).

How dashboards could be used to demonstrate corporate social responsibility

Dashboards monitor the performance of an organization so it could be used to demonstrate corporate social responsibility. Dashboards reflect the obligation of an organization which has to meet the community aspirations.

Conclusion and Recommendations

In conclusion, based on available data, digital dashboards are very useful for organizations to monitor their business performance and making decisions. Digital dashboards should be used broadly in companies in order to help companies develop in the right way.

d. Why might the Enron collapse make a good play?

Executive Summary

The breakdown of Enron is very famous over the world and there is a play about this scandal. This report gives information about the history of Enron and the Enron play, the accounting problem which made Enron fall and the lesson we can learn from this company.


Enron Corporation used to be the most powerful American energy companies in Houston, Texas. However, the rapid collapse of Enron created a big scandal in the financial history. In 2009, the play - Enron was written by the British playwright Lucy Prebble, based on the Enron scandal. It won many awards for best new play as well as best director and best actor (From Wikipedia - Enron, the play). So why might the Enron collapse make a good play?


Enron was established in 1985 by the merger between Houston Natural Gas and InterNorth. There were approximately 21,000 employees in this company and it was one of the world's leading in electricity, natural gas, pulp and paper. In 2000, it reported the revenues of $111 billion dollars. However, in the end of 2001, it collapsed so quickly in an unbelievable way. (Healy and Palepu, 2003, p4)

The collapse of Enron

The fall of Enron was started in August 2001, when CEO Jeffrey Skilling resigned for undisclosed reasons. After that, it fell into loss and debt. Finally, on December 2, 2001, the company declared bankruptcy.

The accounting problem

One of the main reasons why Enron collapsed is the accounting issues. Mark Jickling (2002,p3), Coordinator Specialist in Public Finance Government and Finance Division, mentioned in his report that Enron's operations and finances status were not been shown clearly in the financial statements to shareholders and analysts.

In late 2001, Enron recognized that some new businesses were not operating as well as expected. It had to sell its electric power plant, Portland General Corp., at a loss of $1.1 billion on October 5, 2001. (Healy and Palepu, 2003, p12)

With these accounting problems, the Enron's stock price was halved while its borrowing costs were increased. On November 28, Enron's accepted to be acquired by its competitor, Dynergy, in order to avoid bankruptcy. On November 28, Enron's public debt was dropped to junk bond status, so Dynergy drew back. (Healy and Palepu, 2003, p12)

As a result, on December 2, 2001, Enron led for bankruptcy with its stock price at only $0.26. (Healy and Palepu, 2003, p12)

Lesson from Enron scandal

The fall of Enron in a short-time created a lesson for all companies in the world. One of the most important for all companies to make a business viable is the management of their financial reporting so companies can ensure everything is right. The lesson from many financial mistakes of Enron made a good play, Enron - the Play.


Committee of Sponsoring Organizations of the Treadway Committee (COSO). (1992). Internal Control- Integrated Framework, Executive Summary. www.coso.org.

Juan C. Dürsteler (2004). Digital Dashboards. The digital magazine of InfoVis.net.Retrieved April 12th 2004 from http://www.infovis.net/printMag.php?num=143&lang=2

Horngren, et al. (2008). Introduction to management accounting (14th Ed.). Pearson: Prentice Hall

Wikipedia - Dashboards. Retrieved from: http://en.wikipedia.org/wiki/Dashboards_%28management_information_systems%29

Wikipedia - Enron, the play Retrieved from: http://en.wikipedia.org/wiki/ENRON_%28play%29