Chapter 12, Problem 2BTN

1.

To determine

The cash flow on total assets ratio of A and G for the two most recent years.

Explanation of Solution

Calculate the cash flow on total assets ratio of A for the current year.

Cash flow from operation for the current year is $53,666.

Average total asset is $207,000.

Required formula:

$\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\text{Cash}\text{flow}\text{from}\text{operations}}{\text{Average}\text{total}\text{assets}}$

Calculation:

$\begin{array}{c}\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\$53,666}{\$207,000}\\ =0.26\end{array}$

Hence, the cash flow on total assets ratio in the current year for A is 0.26.

Calculate the cash flow on total assets ratio of A for the previous year.

Cash flow from operation for the current year is $50,856.

Average total asset is $176,064.

Required formula:

$\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\text{Cash}\text{flow}\text{from}\text{operations}}{\text{Average}\text{total}\text{assets}}$

Calculation:

$\begin{array}{c}\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\$50,856}{\$176,064}\\ =0.29\end{array}$

Hence, the cash flow on total assets ratio in the previous year for A is 0.29.

Calculate the cash flow on total assets ratio of G for the current year.

Cash flow from operation for the current year is $18,659.

Average total asset is $110,920.

Required formula:

$\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\text{Cash}\text{flow}\text{from}\text{operation}}{\text{Average}\text{total}\text{assets}}$

Calculation:

$\begin{array}{c}\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\$18,659}{\$110,920}\\ =0.17\end{array}$

Hence, the cash flow on total assets ratio in the current year for G is 0.17.

Calculate the cash flow on total assets ratio of G for the previous year.

Cash flow from operation for the current year is $16,619.

Average total asset is $93,798.

Required formula:

$\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\text{Cash}\text{flow}\text{from}\text{operations}}{\text{Average}\text{total}\text{assets}}$

Calculation:

$\begin{array}{c}\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\$16,619}{\$93,798}\\ =0.18\end{array}$

Conclusion

Hence, the cash flow on total assets ratio in the previous year for G is 0.18.

2.

To determine

To state:

The purpose of cash flow on total assets ratio.

Explanation of Solution

The purpose of cash flow on total assets ratio is explained as follows.

• Cash flow on total assets is a cash-based ratio that helps in evaluating a company’s position to meet its obligations.

• It helps in understanding the quality of earning of a company.

• A company is said to be have good quality of earning, if the cash flow on total assets exceeds the return on total assets.

• It helps in measuring how efficiently a company is using its assets to create a return or income.

Conclusion

Hence, the purpose of cash flow on total assets ratio is discussed as above.

3.

To determine

The company with highest cash flow on total ratio for the given period.

Explanation of Solution

From the calculation in the first part, the following conclusions are obtained.

The cash flow on total assets ratio in the current year for A is 0.26.

The cash flow on total assets ratio in the first previous year for A is 0.29.

The cash flow on total assets ratio in the current year for G is 0.17.

The cash flow on total assets ratio in the first previous year for G is 0.18.

Now, the cash flow on total assets ratio for the second previous year for A and G is to be calculated.

Calculate the cash flow on total assets ratio of A and G for the second previous year.

For A Company:

Cash flow from operation for the current year is $37,529.

Average total asset is $116,371.

Required formula:

$\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\text{Cash}\text{flow}\text{from}\text{operations}}{\text{Average}\text{total}\text{assets}}$

Calculation:

$\begin{array}{c}\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\$37,529}{\$116,371}\\ =0.32\end{array}$

Hence, the cash flow on total assets ratio in the second previous year for A is 0.32.

For G Company:

Cash flow from operation for the current year is $14,565.

Average total asset is $72,574.

Required formula:

$\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\text{Cash}\text{flow}\text{from}\text{operations}}{\text{Average}\text{total}\text{assets}}$

Calculation:

$\begin{array}{c}\text{Cash}\text{flow}\text{on}\text{total}\text{assets}=\frac{\$14,565}{\$72,574}\\ =0.20\end{array}$

Hence, the cash flow on total assets ratio in the second previous year for G is 0.20.

Conclusion

Hence, the cash flow on total assets ratio in the second previous year for A is 0.32, which is the highest between the two companies in the given periods.

4.

To determine

Whether the cash flow on total assets reflects the earnings quality.

Explanation of Solution

• Cash flow on total assets ratio reflects the quality of earning. If the cash flow on the total assets ratio of a company shows a higher percentage than competitors or industry average, then the company has a competitive advantage over them and it would definitely meets its obligation.

• Investors would invest in the company, as the company is efficiently using its assets to create incomes and thereby, it will improve the quality of earnings of the company.

Conclusion

Hence, the cash flow on total assets reflects the quality of earning of a company.