Chapter 16, Problem 2BTN

To determine

(1) Introduction:

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Cash flows on Total Assets – A measure of the total returns on investment in the form of assets. It is an indicator of the profitability of the assets employed by the business.

• It seeks to measure the relation to the cash flows earned on the total assets i.e. the resources employed by the business to directly or indirectly increase revenue or reduce costs.

$\text{CashflowsonTotalAssets=Cashflows/Assetsx100}$

Recent two years cash flows to assets ratio of Apple and Google.

Answer to Problem 2BTN

Solution:

	Apple			Google
$ Millions	Last Year	Prior 1 Year	Prior 2 Years	Last Year	Prior 1 Year	Prior 2 Years
Cash Flows To Total Assets	27.98%	25.76%	25.93%	17.65%	17.32%	17.11%

Explanation of Solution

The following table explains the calculation of the Cash Flows to total assets Ratios for Apple and Google

	Apple			Google
$ Millions	Last Year	Prior 1 Year	Prior 2 Years	Last Year	Prior 1 Year	Prior 2 Years
Operating Cash Flows	$ 81,266	$ 59,713	$ 53,666	$ 26,024	$ 22,376	$ 18,659
Total Assets	$ 290,479	$ 231,839	$ 207,000	$ 147,461	$ 129,187	$ 109,050
Cash Flows To Total Assets	27.98%	25.76%	25.93%	17.65%	17.32%	17.11%
(Operating Cash Flows / Total Assets x 100)

• Cash Flow on Assets ratio is calculated as Operating Cash Flows / Assets x 100. It is an indicator of the return earned from the Assets employed by the business.

• Apples’ Cash flow on Assets Ratio steadily increases from 25.93% to 27.98% over a period of 3 years. A positive trend seems to follow as the overall ratio improves over a period of 3 years.

• Googles’ Cash flow on Assets Ratio steadily increases from 17.11% to 17.65% over a period of 3 years. A positive trend seems to follow as the overall ratio improves over a period of 3 years.

• Apple seems to be stronger in terms of the cash flow on assets as its returns are almost one and a half times that of Google despite having a larger asset base.

Conclusion

Hence the Cash flows on Assets ratio has been calculated for Apple and Google.

To determine

(2) Introduction:

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Cash flows on Total Assets – A measure of the total returns on investment in the form of assets. It is an indicator of the profitability of the assets employed by the business.

• It seeks to measure the relation to the cash flows earned on the total assets i.e. the resources employed by the business to directly or indirectly increase revenue or reduce costs.

$\text{CashflowsonTotalAssets=Cashflows/Assetsx100}$

What the Cash flow on Assets Ratio measures.

Answer to Problem 2BTN

Solution:

The cash flows on assets is an indicator of profitability of the Cash flow from operations in relation to the total assets employed.

Explanation of Solution

• Cash Flows on total Assets are a measure of the total returns on investment in the form of assets.

• This ratio is an indicator of the profitability of the assets employed by the business since the cash flows from operations consist largely of the income from operations through sales of goods and services.

• It seeks to measure the return earned on the total assets i.e. the resources employed by the business to directly or indirectly increase revenue or reduce costs.

• Assets make the production and sale of goods possible and hence the ratio is measured to measure the profitability of the assets employed.

Conclusion

Hence the purpose of calculating the cash flows to assets ratio is established.

To determine

(3) Introduction:

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Cash flows on Total Assets – A measure of the total returns on investment in the form of assets. It is an indicator of the profitability of the assets employed by the business.

• It seeks to measure the relation to the cash flows earned on the total assets i.e. the resources employed by the business to directly or indirectly increase revenue or reduce costs.

$\text{CashflowsonTotalAssets=Cashflows/Assetsx100}$

Which company has the greater cash flows to assets ratio out of Apple and Google.

Answer to Problem 2BTN

Solution:

Apple has the greater cash flow to assets ratio as compared to Google.

Explanation of Solution

The following table explains the calculation of the Cash Flows to total assets Ratios for Apple and Google

	Apple			Google
$ Millions	Last Year	Prior 1 Year	Prior 2 Years	Last Year	Prior 1 Year	Prior 2 Years
Operating Cash Flows	$ 81,266	$ 59,713	$ 53,666	$ 26,024	$ 22,376	$ 18,659
Total Assets	$ 290,479	$ 231,839	$ 207,000	$ 147,461	$ 129,187	$ 109,050
Cash Flows To Total Assets	27.98%	25.76%	25.93%	17.65%	17.32%	17.11%

• Cash Flow on Assets ratio is calculated as Operating Cash Flows / Assets x 100. It is an indicator of the return earned from the Assets employed by the business.

• Apples’ Cash flow on Assets Ratio steadily increases from 25.93% to 27.98% over a period of 3 years. A positive trend seems to follow as the overall ratio improves over a period of 3 years.

• Googles’ Cash flow on Assets Ratio steadily increases from 17.11% to 17.65% over a period of 3 years. A positive trend seems to follow as the overall ratio improves over a period of 3 years.

• Apple seems to be stronger in terms of the cash flow on assets as its returns are almost one and a half times that of Google despite having a larger asset base.

Conclusion

Hence it is established that the cash flow on assets for Apple is higher than that of Google.

To determine

(4) Introduction:

Ratio Analysis

• Ratio analysis is a study of several key metrics of a company based on the data presented in its’ financial statements with an objective to evaluate the financial health of a company.

• It is essential for investors, stakeholders, government bodies etc. to evaluate the key metrics of an entity in order to ensure that the company fulfills the going concern principle and displays financial stability.

The key metrics mentioned above include the following:

• Cash flows on Total Assets – A measure of the total returns on investment in the form of assets. It is an indicator of the profitability of the assets employed by the business.

• It seeks to measure the relation to the cash flows earned on the total assets i.e. the resources employed by the business to directly or indirectly increase revenue or reduce costs.

$\text{CashflowsonTotalAssets=Cashflows/Assetsx100}$

Whether the Cash flow on Assets Ratio reflects on the quality of earnings.

Answer to Problem 2BTN

Solution:

The cash flows on assets are an indicator of profitability of the Cash flow from operations in relation to the total assets employed and hence they do reflect on the quality of the earnings.

Explanation of Solution

• Cash Flows on total Assets are a measure of the total returns on investment in the form of assets. This ratio is an indicator of the profitability of the assets employed by the business since the cash flows from operations consist largely of the income from operations through sales of goods and services.

• It seeks to measure the return earned on the total assets i.e. the resources employed by the business to directly or indirectly increase revenue or reduce costs. The quality of the earnings of the business are determined by the type and nature of assets employed.

• Assets make the production and sale of goods possible and hence the ratio is measured to measure the profitability of the assets employed. The quality of earnings seeks to establish the relation between operating profit earned and the nature of such income.

Conclusion

Hence it is established that cash flows on assets reflect on the quality of the earnings.