On October 16, 2001, Kenneth Lay, chairman and CEO of Enron Corporation, announced the company’s earnings for the first nine months of 2001 as follows:

Our 26 percent increase in recurring earnings per diluted share shows the very strong results of our core wholesale and retail energy businesses and our natural gas pipelines. The continued excellent prospects in these business and Enron’s Leading market position make us very confident in our strong earnings outlook. 13

Less than six months later, the company filed for the biggest bankruptcy is U.S. history. Its stock dropped to less than $1 per share, and a major financial scandal was underway.

Presented on the next page is Enron’s statement of cash flows for the first nine months of 2011 and 2000 (restated to correct the previous accounting errors) Assume you reports to an investment analyst who has asked you to analyze this statement for clues as to why the company went under.

1. for the two time periods shown, compute the cash-generating efficiency ratios of cash flow yield, cash flows to sales (Enron’s revenues were $133,762 million in 2001 and $55,494 million in 2000) and cash flows to assets (use total assets of $61,783 million for 2001 and $64, 926 million for 2000). Also compute free cash flows for the two years.

2. Prepare a memorandum to the investment analyst that assesses Enron’s cash generating efficiency in light of the chairman’s remarks and that evaluates its available free cash flow, taking into account its financing activities. Identify significant changes in Enron’s operating items and any special operating items that should be considered. Include your computations as an attachment.