Financial Accounting
Financial Accounting
5th Edition
ISBN: 9781259914898
Author: SPICELAND
Publisher: MCG
Question
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Chapter 11, Problem 4AP

1.

To determine

Calculate cash return on assets, cash flow to sales, and asset turnover ratio for Incorporation AE.

1.

Expert Solution
Check Mark

Explanation of Solution

Cash return on assets: Cash return on assets is the ratio that indicates the profit generated from the operating cash flows using the total assets of the company. It measures the operating cash flows earned per dollar of assets.

Cash Return on Assets=Operating cash flows Average Total Assets

Given, Operating cash flow of Incorporation AE is $394,426 and total assets at beginning and at ending are $1,816,313 and $1,782,660 respectively.

Calculate Incorporation AE’s cash return on assets:

Cash Return on Assets=Operating cash flows Average Total Assets=$394,426($1,816,313+$1,782,660)÷2=$394,426$1,799,487=21.9%

Therefore, cash return on assets of Incorporation AE is 21.9%.

Cash flow to sales: Cash flow to sales ratio is used to determine the amount of operating cash flows that is being generated per dollar of revenue or sales.

Cash flow to sales=Operating cash flowsNet Sales 

Given, Operating cash flow is $394,426 and net sales revenue is $3,795,549.

Calculate Incorporation AE’s cash flow to sales:

Cash flow to sales=Operating cash flowsNet Sales =$394,426$3,795,549=10.4%

Therefore, profit margin of Incorporation AE is 10.4%.

Total Asset turnover: Total asset turnover is a ratio that measures the productive capacity of the total assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets.

Total Assets turnoverratio=NetSalesRevenueAveragetotalAssets

Given, net sales are $3,795,549 and total assets at beginning and at ending are $1,816,313 and $1,782,660 respectively.

Compute Incorporation AE’s total assets turnover:

Total Assets turnoverratio=NetSalesRevenueAveragetotalAssets=$3,795,549($1,816,313+$1,782,660)÷2=$3,795,549$1,799,487=2.1times

Therefore, Incorporation AE’s total asset turnover is 2.1 times.

2.

To determine

Calculate the Incorporation B’s cash return on assets, cash flow to sales, and asset turnover ratio.

2.

Expert Solution
Check Mark

Explanation of Solution

Cash return on assets: Cash return on assets is the ratio that indicates the profit generated from the operating cash flows using the total assets of the company. It measures the operating cash flows earned per dollar of assets.

Cash Return on Assets=Operating cash flows Average Total Assets

Given, operating cash flows of Incorporation B is $119,721 and total assets at beginning and at ending are $538,116 and $579,847 respectively.

Calculate Incorporation B’s cash return on assets:

Return on Assets (ROA)=NetIncomeAverageTotalAssets=$119,721($538,116+$579,847)÷2=$119,721$558,982=21.4%

Therefore, return on assets of Incorporation B is 21.4%.

Cash flow to sales: Cash flow to sales ratio is used to determine the amount of operating cash flows that is being generated per dollar of revenue or sales.

Cash flow to sales=Operating cash flowsNet Sales 

Given, operating cash flows is $119,721 and net sales revenue is $913,380.

Calculate Incorporation B’s profit margin:

Cash flow to sales=Operating cash flowsNet Sales Revenue=$119,721$913,380=13.1%

Therefore, profit margin of Incorporation B is 13.1%.

Total Asset turnover: Total asset turnover is a ratio that measures the productive capacity of the total assets to generate the sales revenue for the company. Thus, it shows the relationship between the net sales and the average total fixed assets.

Total Assets turnoverratio=NetSalesRevenueAveragetotalAssets

Given, net sales are $913,380 and total assets are at beginning and at ending are $538,116 and $579,847 respectively.

Compute Incorporation B’s total assets turnover:

Total Assets turnoverratio=NetSalesRevenueAveragetotalAssets=$913,380($538,116+$579,847)÷2=$913,380$558,982=1.6times

Therefore, Incorporation B’s total asset turnover is 1.6 times.

3.

To determine

Identify the company which is doing better based on cash return on assets and also identify the company which is having higher cash flow to sales and total asset turnover.

3.

Expert Solution
Check Mark

Explanation of Solution

Find the company which is doing better based on return on assets and the company having higher cash flow to sales and asset turnover:

ParticularsIncorporation AEIncorporation B
Cash return on assets21.9%21.4%
Cash flow to sales10.4%13.1%
Total assets turnover2.1 times1.6 times

Table (1)

As per Table (1), Incorporation AE is having the better cash return on asset ratio and higher total assets turnover ratio when compared with Incorporation B. The cash flow to sales ratio of Incorporation B is higher than the cash flow to sales ratio of Incorporation AE.

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Chapter 11 Solutions

Financial Accounting

Ch. 11 - Prob. 11SSQCh. 11 - Prob. 12SSQCh. 11 - Prob. 13SSQCh. 11 - Prob. 14SSQCh. 11 - Prob. 15SSQCh. 11 - Applying Excel #11-1 A company reports net income...Ch. 11 - Prob. 2AECh. 11 - Prob. 1RQCh. 11 - Prob. 2RQCh. 11 - Prob. 3RQCh. 11 - 4. Why is it necessary to use an income statement,...Ch. 11 - Prob. 5RQCh. 11 - Prob. 6RQCh. 11 - Prob. 7RQCh. 11 - Prob. 8RQCh. 11 - Prob. 9RQCh. 11 - Prob. 10RQCh. 11 - Prob. 11RQCh. 11 - Prob. 12RQCh. 11 - Prob. 13RQCh. 11 - Prob. 14RQCh. 11 - Prob. 15RQCh. 11 - Prob. 16RQCh. 11 - Prob. 17RQCh. 11 - Prob. 18RQCh. 11 - Prob. 19RQCh. 11 - Prob. 20RQCh. 11 - BE11-1 Classify each of the following items as an...Ch. 11 - BE11-2 The following selected transactions occur...Ch. 11 - BE11-3 Place the following items in the correct...Ch. 11 - BE11-4 Laser World reports net income of $650,000....Ch. 11 - BE11-5 Macrosoft Company reports net income of...Ch. 11 - BE11-6 Hi-Tech, Inc., reports net income of $70...Ch. 11 - BE11-7 Engineering Wonders reports net income of...Ch. 11 - BE11-8 Creative Sound Systems sold investments,...Ch. 11 - Prob. 9BECh. 11 - BE11-10 Technologies Worldwide purchased land for...Ch. 11 - Prob. 11BECh. 11 - Prob. 12BECh. 11 - BE11-13 A-2-Z Design Services engaged in the...Ch. 11 - Prob. 14BECh. 11 - Prob. 15BECh. 11 - Prob. 16BECh. 11 - Prob. 17BECh. 11 - Prob. 18BECh. 11 - Prob. 19BECh. 11 - Prob. 20BECh. 11 - Prob. 1ECh. 11 - Prob. 2ECh. 11 - E11-3 Analysis of an income statement, balance...Ch. 11 - E11-4 Wi-Fi, Inc., has the following selected...Ch. 11 - Prob. 5ECh. 11 - Prob. 6ECh. 11 - Prob. 7ECh. 11 - Prob. 8ECh. 11 - E11-9 Software Distributors reports net income of...Ch. 11 - Prob. 10ECh. 11 - Prob. 11ECh. 11 - Prob. 12ECh. 11 - Prob. 13ECh. 11 - Prob. 14ECh. 11 - Prob. 15ECh. 11 - Calculate operating activities—direct method...Ch. 11 - Prob. 17ECh. 11 - Prob. 18ECh. 11 - Prob. 19ECh. 11 - Prob. 20ECh. 11 - Prob. 1PACh. 11 - Prob. 2PACh. 11 - Prob. 3PACh. 11 - Prob. 4PACh. 11 - Prob. 5PACh. 11 - Prob. 6PACh. 11 - Prob. 7PACh. 11 - Prob. 8PACh. 11 - Prob. 1PBCh. 11 - Prob. 2PBCh. 11 - Prob. 3PBCh. 11 - Prob. 4PBCh. 11 - Prob. 5PBCh. 11 - Prob. 6PBCh. 11 - Prob. 7PBCh. 11 - Prepare an income statement using operating cash...Ch. 11 - Great Adventures (This is a continuation of the...Ch. 11 - Prob. 2APCh. 11 - Prob. 3APCh. 11 - Prob. 4APCh. 11 - Prob. 5APCh. 11 - Prob. 7APCh. 11 - Prob. 8AP
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