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 businesses and Enron's leading market position make us very confident in our strong earnings outlook.
Less than six months later, the company filed for the biggest bankruptcy in U.S. history. Its stock dropped to less than $1 per share, and a major financial scandal was underway. Enron's statement of cash flows for the first nine months of 2001 and 2000 (restated to correct the previous accounting errors) follow. Assume you report 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. (Round to one decimal place or the nearest tenth of a percent.)
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.

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Enron Corporation Statement of Cash Flows For the Nine Months Ended September 30, 2001 and 2000 (In millions) Cash Flows from Operating Activities: Reconciliation of net income to net 2001 2000 cash provided by operating activities: Net income Cumulative effect of accounting changes, net of tax Depreciation, depletion and amortization Deferred income taxes Gains on sales of non-trading assets Investment losses Ch $ 225 (19) 746 (134) (49) 768 $ 797 617 8 (135) 0 anges in components of working capital Receivables Inventories Payables Other Trading investments Net margin deposit activity Other trading activities Other, net Net Cash Provided by (Used in) Operating Activities 987 (3,363) 339 2,899 (455) (1,764) 464 (2,349) 173 198 (753) 541 (555) (566) $127 Cash Flows from Investing Activities: Capital expenditures Equity investments Proceeds from sales of non-trading investments Acquisition of subsidiary stock Business acquisitions, net of cash acquired Other investing activities Net Cash Used in Investing Activities Cash Flows from Financing Activities: Issuance of long-term debt Repayment of long-term debt Net increase in short-term borrowings Issuance of common stock Net redemption of company-obligated $(1,539) (858) $(1,584) (1,172) 1,711 0 (82) (239) (1,366) (485) (773) (147) S(3,580) 4,060 (3,903) 2,365 199 2,725 (579) 1,694 182 (95) (396) 354 (12) preferred securities of subsidiaries Dividends paid Net (acquisition) disposition of treasury stock Other financing activities Net Cash Provided by Financing Activities Increase (Decrease) in Cash and Cash Equivalents Cash and Cash Equivalents, Beginning of Period Cash and Cash Equivalents, End of Period 0 (394) (398) (49) 1,880 $ (239) 1,240 3,873 $ 420 1,001 $ 753