Explanation For A Firm’s High ROE

Question

1. Which of the following is the least likely explanation of a firm’s high ROE?

A. The firm is growing.
B. The firm is able to find investment opportunities that are very profitable.
C. The firm has very efficient use of its assets.
D. The firm enjoys high sales margins.

2. One way Enron manipulated its financial statements was to sell assets at inflated prices to other firms, while giving a promise to buy back those assets at a later date. The incoming cash was recorded as revenue, but the promise to buy back the assets was not disclosed. Which of the following is one of the ways that such a transaction is deceptive?

A. The assets should have been listed on the balance sheet as long-term assets.
B. Cash raised by selling assets should not be recorded as revenue.
C. The cash raised should have been recorded as short-term loans.
D. The off-balance sheet promises to repurchase assets should have been disclosed in management discussion and analysis (MD&A) or notes to the financial statement.

Summary

These short questions belong to Finance. The 1st question is about finding the least likely explanation for a firm’s high ROE. The 2nd question is about a company that manipulated its financial statements to sell its assets at inflated prices.

Total Word Count 32

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