Question

A company reported average total assets of \(1,240,000 in 2016 and \)1,510,000 in 2017. Its net operating cash flow was \(102,920 in 2016 and \)138,920 in 2017. Calculate its cash flow on total assets ratio for both years. Comment on the results and any change in performance.

Short answer

The cash flow on total assets ratio for 2016 and 2017 is8.3%and 9.2%.

The ratio has improved from the year 2016 to 2017

Step-by-step solution

Meaning of Cash flow Statement

The cash flow statement refers to a financial statement that shows the changes in the company's cash and cash equivalents throughout an accounting period.

Calculating cash flow on total assets ratio

Ratio for 2016

$\begin{array}{rcl}\mathit{C}\mathit{a}\mathit{s}\mathit{h}\mathbf{}\mathit{f}\mathit{l}\mathit{o}\mathit{w}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{t}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathbf{}\mathit{a}\mathit{s}\mathit{s}\mathit{e}\mathit{t}& \mathbf{=}& \frac{\mathbf{N}\mathbf{e}\mathbf{t}\mathbf{}\mathbf{o}\mathbf{p}\mathbf{e}\mathbf{r}\mathbf{a}\mathbf{t}\mathbf{i}\mathbf{n}\mathbf{g}\mathbf{}\mathbf{c}\mathbf{a}\mathbf{s}\mathbf{h}\mathbf{}\mathbf{f}\mathbf{l}\mathbf{o}\mathbf{w}}{\mathbf{A}\mathbf{v}\mathbf{e}\mathbf{r}\mathbf{a}\mathbf{g}\mathbf{e}\mathbf{}\mathbf{t}\mathbf{o}\mathbf{t}\mathbf{a}\mathbf{l}\mathbf{}\mathbf{a}\mathbf{s}\mathbf{s}\mathbf{e}\mathbf{s}\mathbf{t}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{102}\mathbf{,}\mathbf{920}}{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{240}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{8}\mathbf{.}\mathbf{3}\mathbf{\%}\end{array}$

Ratio for 2017

$\begin{array}{rcl}\mathit{C}\mathit{a}\mathit{s}\mathit{h}\mathbf{}\mathit{f}\mathit{l}\mathit{o}\mathit{w}\mathbf{}\mathit{o}\mathit{n}\mathbf{}\mathit{t}\mathit{o}\mathit{t}\mathit{a}\mathit{l}\mathbf{}\mathit{a}\mathit{s}\mathit{s}\mathit{e}\mathit{t}& \mathbf{=}& \frac{\mathbf{Net}\mathbf{}\mathbf{operating}\mathbf{}\mathbf{cash}\mathbf{}\mathbf{flow}}{\mathbf{Average}\mathbf{}\mathbf{total}\mathbf{}\mathbf{assest}}\\ & \mathbf{=}& \frac{\mathbf{\$}\mathbf{138}\mathbf{,}\mathbf{920}}{\mathbf{\$}\mathbf{1}\mathbf{,}\mathbf{510}\mathbf{,}\mathbf{000}}\\ & \mathbf{=}& \mathbf{9}\mathbf{.}\mathbf{2}\mathbf{\%}\end{array}$

Interpretation

The ratios for both years are desirable since they are positive and acceptable (most firms can thrive with yearly returns at or around 10%). Additionally, the ratio increased from 8.3% to 9.2%, an improvement.