Chapter 11, Problem 11.4APCA

(1)

To determine

Cash return on assets, cash flow to sales and asset turnover of Company A

Explanation of Solution

Cash return on assets:

Cash return on assets if the ration that indicates the profit generated from the operating cash flows over the total assets of the company.

Cash flow to sales:

Cash flow to sales is the ration that indicates the net sales of the company in proportion to the average total assets of the company.

Asset turnover:

Asset turnover is the ration that indicates the net sales of the company in proportion to its average total assets.

Cash return on assets is 27.0% (2)

Cash flow to sales is 14.4% (3)

Asset turnover is 1.9 times (4)

Working note:

1. Calculate the Average total assets:

$\begin{array}{c}\text{Average}\text{total}\text{assets=}\frac{\text{Total}\text{assets(current}\text{year)+Total}\text{assets(Previousyear)}}{\text{2}}\\ \text{=}\frac{\text{\$1,950,802+\$1,756,053}}{\text{2}}\\ \text{=\$1,853,428}\end{array}$ (1)

2. Calculate the cash return on assets:

$\begin{array}{c}\text{Cash}\text{return}\text{on}\text{assets=}\frac{\text{Operating}\text{cash}\text{flows}}{\text{Average}t\text{otal}\text{assets(1)}}\text{×100}\\ \text{=}\frac{\text{\$499,671}}{\text{\$1,853,428}}\text{×100}\\ \text{=27}\text{.0\%}\end{array}$ (2)

3. Calculate the cash flow to sales:

$\begin{array}{c}\text{Cash}\text{flow}\text{to}\text{sales=}\frac{\text{Operating}\text{cash}\text{flows}}{\text{Sales}}\text{×100}\\ \text{=}\frac{\text{\$499,671}}{\text{\$3,475,802}}\text{×100}\\ \text{=14}\text{.4\%}\end{array}$ (3)

4. Calculate the asset turnover:

$\text{Asset}\text{turnover=}\frac{\text{Sales}}{\begin{array}{l}\text{Average}\text{total}\text{assets(1)}\\ \text{=}\frac{\text{\$3,475,802}}{\begin{array}{l}\text{\$1,853,428}\\ \text{=1}\text{.9times}\text{.}\end{array}}\end{array}}$ (4)

Note: All dollars in amounts of thousands.

(2)

To determine

Cash return on assets, cash flow to sales and asset turnover of Company B

Explanation of Solution

Cash return on assets:

Cash return on assets if the ration that indicates the profit generated from the operating cash flows over the total assets of the company.

Cash flow to sales:

Cash flow to sales is the ration that indicates the net sales of the company in proportion to the average total assets of the company.

Asset turnover:

Asset turnover is the ration that indicates the net sales of the company in proportion to its average total assets.

Cash return on assets =43.8% (6)

Cash flow to sales   =19.7% (7)

Asset turnover =2.2 times (8)

Working note:

1. Calculate the Average total assets:

$\begin{array}{c}\text{Average}\text{total}\text{assets=}\frac{\text{Total}\text{assets(current}\text{year)+Total}\text{assets(Previousyear)}}{\text{2}}\\ \text{=}\frac{\text{\$531,539+\$477,974}}{\text{2}}\\ \text{=\$504,757}\end{array}$ (5)

2. Calculate the cash return on assets:

$\begin{array}{c}\text{Cash}\text{return}\text{on}\text{assets=}\frac{\text{Operating}\text{cash}\text{flows}}{\text{Average}t\text{otal}\text{assets(1)}}\text{×100}\\ \text{=}\frac{\text{\$220,941}}{\text{\$504,757}}\text{×100}\\ \text{=43}\text{.8\%}\end{array}$ (6)

3. Calculate the cash flow to sales:

$\begin{array}{c}\text{Cash}\text{flow}\text{to}\text{sales=}\frac{\text{Operating}\text{cash}\text{flows}}{\text{Sales}}\text{×100}\\ \text{=}\frac{\text{\$220,941}}{1,124,007}\text{×100}\\ \text{=19}\text{.7\%}\end{array}$ (7)

4. Calculate the asset turnover:

$\text{Asset}\text{turnover=}\frac{\text{Sales}}{\begin{array}{l}\text{Average}\text{total}\text{assets(1)}\\ \text{=}\frac{\text{\$1,124,007}}{\begin{array}{l}\text{\$504,757}\\ \text{=2}\text{.2times}\text{.}\end{array}}\end{array}}$ (8)

Note: All dollars in amounts of thousands.

(3)

To determine

To compare: Cash return on asset, Cash flow to sales and asset turnover of Company A and Company B

Explanation of Solution

Cash return on assets:

Cash return on assets if the ration that indicates the profit generated from the operating cash flows over the total assets of the company.

Cash flow to sales:

Cash flow to sales is the ration that indicates the net sales of the company in proportion to the average total assets of the company.

Asset turnover:

Asset turnover is the ration that indicates the net sales of the company in proportion to its average total assets.

Particulars	Company A	Company B
Cash return on assets	27.00%	43.8%
Cash flow to sales	14.4%	19.70%
Asset turnover	1.9times	2.2times

Table (1)

Company B has higher cash return on assets, Cash flow to sales and asset turnover comparing to the Company A.