Chapter 16, Problem 3AA

1.

To determine

Compute the recent two year’s cash flow on total assets ratio for Company SE, Company A and Incorporation G.

Explanation of Solution

Cash flow to total assets ratio: Cash flow to total assets ratio is used to measure the actual cash inflows with respect to the assets of the company without being affected by income recognitions and measurements. This ratio is calculated by using the formula given below:

$\text{Cash flow to total assets}=\frac{\text{Operating cash flows}}{\text{Average total assets}}$

Compute the cash flow on total assets ratio for Company SE:

Current year:

$\begin{array}{c}\text{Cash flow to total assets}=\frac{\text{Operating cash flows}}{\text{Average total assets}}\\ =\frac{62,162,041}{\left(\frac{301,752,090+262,174,324}{2}\right)}\\ =\frac{62,162,041}{281,963,207}\\ =22.0\%\end{array}$

Thus, the cash flow on total assets ratio for the current year of Company SE is 22.0%.

Prior year:

$\begin{array}{c}\text{Cash flow to total assets}=\frac{\text{Operating cash flows}}{\text{Average total assets}}\\ =\frac{47,385,644}{\left(\frac{262,174,324+242,179,521}{2}\right)}\\ =\frac{47,385,644}{252,176,923}\\ =18.8\%\end{array}$

Thus, the cash flow on total assets ratio for the prior year of Company SE is 18.8%.

Compute the cash flow on total assets ratio for Company A:

Current year:

$\begin{array}{c}\text{Cash flow to total assets}=\frac{\text{Operating cash flows}}{\text{Average total assets}}\\ =\frac{\$63,598}{\left(\frac{\$375,319+\$321,686}{2}\right)}\\ =\frac{\$63,598}{\$348,503}\\ =18.2\%\end{array}$

Thus, the cash flow on total assets ratio for the current year of Company A is 18.2%.

Prior year:

$\begin{array}{c}\text{Cash flow to total assets}=\frac{\text{Operating cash flows}}{\text{Average total assets}}\\ =\frac{\$65,824}{\left(\frac{\$321,686+\$290,345}{2}\right)}\\ =\frac{\$65,824}{\$306,016}\\ =21.5\%\end{array}$

Thus, the cash flow on total assets ratio for the prior year of Company A is 21.5%.

Compute the cash flow on total assets ratio for Incorporation G:

Current year:

$\begin{array}{c}\text{Cash flow to total assets}=\frac{\text{Operating cash flows}}{\text{Average total assets}}\\ =\frac{\$37,091}{\left(\frac{\$197,295+\$167,497}{2}\right)}\\ =\frac{\$37,091}{\$182,396}\\ =20.3\%\end{array}$

Thus, the cash flow on total assets ratio for the current year of Incorporation G is 20.3%.

Prior year:

$\begin{array}{c}\text{Cash flow to total assets}=\frac{\text{Operating cash flows}}{\text{Average total assets}}\\ =\frac{\$36,036}{\left(\frac{\$167,497+\$147,461}{2}\right)}\\ =\frac{\$36,036}{\$157,479}\\ =22.9\%\end{array}$

Thus, the cash flow on total assets ratio for the prior year of Incorporation G is 22.9%.

2.

To determine

Identify whether the change in cash flow on total assets ratio is favorable or unfavorable.

Explanation of Solution

Cash flow to total assets ratio: Cash flow to total assets ratio is used to measure the actual cash inflows with respect to the assets of the company without being affected by income recognitions and measurements.

Company SE’s cash flow on total assets ratio during the current year is 22.0% and this indicates that the Company SE is having favorable cash flow on total assets ratio.

3.

To determine

Identify whether Company SE’s cash flow on total assets ratio is better or worse than Company A and Incorporation G.

Explanation of Solution

Cash flow to total assets ratio: Cash flow to total assets ratio is used to measure the actual cash inflows with respect to the assets of the company without being affected by income recognitions and measurements.

• The cash flow on total assets ratio of Company A during the current year is 18.2% and for Company SE is 22.0%. This indicates that Company SE is better than Company A.
• The cash flow on total assets ratio of Incorporation G during the current year is 20.3% and for Company SE is 22.0%. This indicates that Company SE is better than Incorporation G.