Question

Key figures for Apple and Google follow.

Apple

Google

\( millions	Current year	1 year prior	2 years prior	Current year	1 year prior	2 years prior
Operating cash flow	\)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

Required

1. Compute the recent two years’ cash flow on total assets ratios for Apple and Google.

2. What does the cash flow on total assets ratio measure?

3. Which company has the highest cash flow on total assets ratio for the periods shown?

4. Does the cash flow on total assets ratio reflect on the quality of earnings? Explain.

Short answer

1. Cash flow on total assets ratio:

Apple

Google

Current year	1 year prior	Current year	1 year prior
31%	27%	19%	19%

2. Cash flow to total asset ratio provides information regarding the earnings realized in cash.

3. The company that reports a higher cash flow to total asset ratio is Apple company.

4. Cash flow to total asset ratio is compared with the return on total assets to determine the quality of earnings.

Step-by-step solution

Definition of Financial Ratios

All the comparisons made between the various line items of the financial statement to draw any useful conclusion are known as financial ratios. Such comparisons provide information about the business entity's profitability, liquidity, efficiency, and solvency.

Cash flow on total assets ratio

Apple

Google

$ millions	Current year	1 year prior	2 years prior	Current year	1 year prior	2 years prior
Operating cash flow	$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
Average total assets	$261,159	$219,420		$138,324	$119,119
Cash flow to total assets ratio	31%	27%		19%	19%

Working note:

The formula for average total assets:

$\mathbf{Average}\mathbf{}\mathbf{total}\mathbf{}\mathbf{assets}\mathbf{=}\frac{\mathbf{Current}\mathbf{}\mathbf{year}\mathbf{}\mathbf{assets}\mathbf{+}\mathbf{Previous}\mathbf{}\mathbf{year}\mathbf{}\mathbf{assets}\mathbf{}}{\mathbf{2}}$

The formula for calculation of cash flow to total assets ratio:

$\mathbf{Cash}\mathbf{}\mathbf{flow}\mathbf{}\mathbf{to}\mathbf{}\mathbf{total}\mathbf{}\mathbf{assets}\mathbf{=}\frac{\mathbf{Operating}\mathbf{}\mathbf{cash}\mathbf{}\mathbf{flow}}{\mathbf{Average}\mathbf{}\mathbf{total}\mathbf{}\mathbf{assets}}\mathbf{\times }\mathbf{100}$

Information disclosed by cash flow on total asset ratio

Cash flow on total asset ratio provides information regarding the earnings quality of the business entity by providing information about the income recognized in cash.

Company with the highest cash flow on total asset ratio

Apple reports the highest cash flow on a total asset ratio of 31%.

Information relating to quality of earnings provided by cash flow on total asset ratio

The cash on total asset ratio is compared with the return on total asset ratio for making decisions regarding the quality of the earnings. Their comparison provides information about the percentage of earnings realized by the business entity in cash.