Question

Please answer the question using examples of what you saw in the movie and your own experience. An answer of anything like “Yes I do” or “No I don’t” will not receive credit. a) What is mark-to-market accounting? Explain in a few sentences. b) Why types of companies could justifiably use this accounting method? State type of company and why you believe it would be justifiable. c) How did Enron abuse mark-to-market accounting methods? Please provide at least one example and why you believe there was abuse involved.

Answer 1

A) mark to market accounting method is a method in which, day to day profit and losses are adjusted to the accounts and it can be reflecting the proper profitability position which has not been realised by the company as we can see when we are holding a stock and we did not realise the gain or loss we will be looking at the mark to market.

B.)companies would justify use of Mark to market transactions who are entering into a large number of hedging transaction and those companies are introduced into the foreign transaction and those companies have exports and imports from the other countries so they can be trying to Mark to market their overall receivables and payables in order to have a better reflection of the books of accounts.

C) Enron had abused mark to market by inflating its overall receivables even after it's receivables were not accurate and not confirmed so it was trying to receive those receivables as assets at fair value in the overall balance sheet and they were trying to make overall income for the company and they were increasing the profitability but in the long run those assets were not realise that the profits were reduced because the contracts were cancelled and that led to the downfall of the company because of inflation of the books due to higher profitability and mark to market.

Enron used that Income to be discounted at present value and they realised it in their books of accounts and when the income was not realised it lead to window dressing