Chapter 11, Problem 11.12E

Requirement – 1

To determine

Return on total Assets:

It is a measure to evaluate the efficiency of company’s assets. It reports the profit earned as the percentage of total assets used in the business. A company’s rate of return on total assets reflects its ability to optimize the use of total assets.

The formula to compute return on asset:

$\text{Return on Assets}=\frac{\text{Net Income}}{\text{Average Total Assets}}$

To calculate: The return on assets of Company Z.

Requirement – 2

To determine

Cash return on assets:

It refers to the rate of cash generated from the investments in assets of company. It is relationship between the cash flows from operating activities and average total assets.

The formula to compute cash return on assets:

$\text{Cash return on assets = }\frac{\text{Cash flows from operating activities}}{\text{Average total assets}}$

To calculate: The cash return on assets of Company Z.

Requirement – 3

To determine

Cash flows to sales:

It measures the cash generated from operating activities for each dollar of sales.

The formula to compute cash return on assets

$\text{Cash return on assets}=\frac{\text{Cash flows from operating activities}}{\text{Net sales}}$

Assets Turnover:

It’s a measure to evaluate the efficiency of total assets used in the business to generate sales during a certain period. Assets turnover reflects the net sales as the times of average total assets.

The formula to compute asset turnover

$\text{Asset Turnover}=\frac{\text{Net sales}}{\text{Average Total Assets}}$

To calculate: The cash flow to sales ratio and asset turnover ratio of Company Z: