Off - Off-Balance-Sheet Financing A concern for analysts...

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Off-Balance-Sheet Financing A concern for analysts when they evaluate a company's liquidity and solvency is whether that company has properly recorded all of its obligations. The bankruptcy of Enron Corporation, one of the largest bankruptcies in U.S. history, demonstrated how much damage can result when a company does not properly record or disclose all of its debts. Many would say Enron was practicing off-balance-sheet financing. Off-balance-sheet financing is an intentional effort by a company to structure its financing arrangements so as to avoid showing liabilities on its balance sheet. Two common types of off-balance-sheet financing result from unreported contingencies and lease transactions. Contingencies One reason a company's balance sheet might not fully reflect its potential obligations is due to contingencies. Contingencies are events with uncertain outcomes that may represent potential liabilities. A common type of contingency is lawsuits. Suppose, for example, that you were analyzing the financial statements of a cigarette manufacturer and did not consider the possible negative implications of existing unsettled lawsuits. Your analysis of the company's financial position would certainly be misleading. Other common types of contingencies are product
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This note was uploaded on 11/08/2011 for the course ACCOUNTING ac 201 taught by Professor - during the Spring '11 term at Montgomery.

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Off - Off-Balance-Sheet Financing A concern for analysts...

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