Chapter 11, Problem 11.4APCA

American Eagle Outfitters, Inc. vs. The Buckle, Inc.

Financial information for American Eagle is presented in Appendix A at the end of the book, and financial information for Buckle is presented in Appendix B at the end of the book.

Required:

  1.    Calculate American Eagle’s cash return on assets, cash flow to sales, and asset turnover ratio.

  2.    Calculate Buckle’s cash return on assets, cash flow to sales, and asset turnover ratio.

  3.    Which company is doing better based on cash return on assets? Which company has the higher cash flow to sales? Which company has the higher asset turnover?

To determine

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.

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

Answer to Problem 11.4APCA

a. Cash return on assets =20.0% (2)

b. Cash flow to sales   =10.3% (3)

c. Asset turnover (4)

Explanation of Solution

Working note:

1. Calculate the Average total assets:

$\begin{array}{c}\text{Average}\text{total}\text{assets=}\frac{\text{Total}\text{assets(current}\text{year)+Total}\text{assets(Previousyear)}}{\text{2}}\\ \text{=}\frac{\text{\$1,694,164+\$1,696,908}}{\text{2}}\\ \text{=\$1,695,536}\text{.}\end{array}$ (1)

2. Calculate the cash return on assets:

$\begin{array}{c}\text{Cash}\text{return}\text{on}\text{assets=}\frac{\text{Operating}\text{cash}\text{flows}}{\text{Average}t\text{otal}\text{assets(1)}}\text{×100}\\ \text{=}\frac{\text{\$338,426}}{\text{\$1,695,536}}\text{×100}\\ \text{=20}\text{.0\%}\end{array}$ (2)

3. Calculate the cash flow to sales:

$\begin{array}{c}\text{Cash}\text{flow}\text{to}\text{sales=}\frac{\text{Operating}\text{cash}\text{flows}}{\text{Sales}}\text{×100}\\ \text{=}\frac{\text{\$338,426}}{\text{\$3,282,867}}\text{×100}\\ \text{=10}\text{.3\%}\end{array}$ (3)

4. Calculate the asset turnover:

$\text{Asset}\text{turnover=}\frac{\text{Sales}}{\begin{array}{l}\text{Average}\text{total}\text{assets(1)}\\ \text{=}\frac{\text{\$3,282,867}}{\begin{array}{l}\text{\$1,695,536}\\ \text{=1}\text{.9times}\text{.}\end{array}}\end{array}}$ (4)

Note: All dollars in amounts of thousands.

To determine

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.

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

Answer to Problem 11.4APCA

a. Cash return on assets =35.9% (2)

b. Cash flow to sales   =17.0% (3)

c. Asset turnover (4)

Explanation of Solution

Working note:

1. Calculate the Average total assets:

$\begin{array}{c}\text{Average}\text{total}\text{assets=}\frac{\text{Total}\text{assets(current}\text{year)+Total}\text{assets(Previousyear)}}{\text{2}}\\ \text{=}\frac{\text{\$546,293+\$542,993}}{\text{2}}\\ \text{=\$544,643}\text{.}\end{array}$ (1)

2. Calculate the cash return on assets:

$\begin{array}{c}\text{Cash}\text{return}\text{on}\text{assets=}\frac{\text{Operating}\text{cash}\text{flows}}{\text{Average}t\text{otal}\text{assets(1)}}\text{×100}\\ \text{=}\frac{\text{\$195,768}}{\text{\$544,643}}\text{×100}\\ \text{=35}\text{.9\%}\end{array}$ (2)

3. Calculate the cash flow to sales:

$\begin{array}{c}\text{Cash}\text{flow}\text{to}\text{sales=}\frac{\text{Operating}\text{cash}\text{flows}}{\text{Sales}}\text{×100}\\ \text{=}\frac{\text{\$195,768}}{1,153,142}\text{×100}\\ \text{=17}\text{.0\%}\end{array}$ (3)

4. Calculate the asset turnover:

$\text{Asset}\text{turnover=}\frac{\text{Sales}}{\begin{array}{l}\text{Average}\text{total}\text{assets(1)}\\ \text{=}\frac{\text{\$1,153,142}}{\begin{array}{l}\text{\$544,643}\\ \text{=2}\text{.1times}\text{.}\end{array}}\end{array}}$ (4)

Note: All dollars in amounts of thousands.

To determine

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.

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

Answer to Problem 11.4APCA

Particulars	Company A	Company B
Cash return on assets	20.00%	35.90%
Cash flow to sales	10.30%	17.00%
Asset turnover	1.9times	2.9times

Table (1)

Explanation of Solution

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