International Genetic Technologies (InGen) and The Resources Development Association (RDA) are companies involved in cutting-edge genetics research. Selected financial data are provided below:
($ in millions) | InGen | RDA |
Net sales | $127,245 | $106,916 |
Net income | 7,074 | 15,855 |
Operating |
12,639 | 19,846 |
Total assets, beginning | 124,503 | 113,452 |
Total assets, ending | 129,517 | 116,433 |
Required:
1. Calculate the return on assets for both companies.
2. Calculate the cash return on assets for both companies.
3. Calculate the cash flow to sales ratio and the asset turnover ratio tor both companies.
4. Which company has the more favorable ratios?
Requirement – 1
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:
To calculate: The return on assets for both companies.
Answer to Problem 11.5BP
The return on assets of Company I and Company R is 5.7% and 13.8% respectively.
Explanation of Solution
The return on assets for both companies is as follows:
Company I:
Company R:
Calculate the average total assets of Company I.
Calculate the average total assets of Company R.
Requirement – 2
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:
To calculate: The cash return on assets for both companies
Answer to Problem 11.5BP
The cash return on assets of Company I and Company R is 10.2% and 17.3% respectively.
Explanation of Solution
The cash return on assets for both companies is as follows:
Company I:
Company R:
Requirement – 3
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
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
To calculate: The cash flow to sales ratio and asset turnover ratio for both companies:
Answer to Problem 11.5BP
The cash flow to sales ratio of Company I and Company R is 9.9% and 18.6% respectively, and assets turnover ratio of Company I and Company R is 1.0 times and 0.9 times respectively.
Explanation of Solution
The cash flow to sales ratio and asset turnover ratio for both companies are as follows:
Cash flow to sales ratio:
Company I:
Company R:
Assets Turnover:
Company I:
Company R:
Requirement – 4
To discuss: Which company has more favorable ratios.
Explanation of Solution
- The return on asset of Company R is higher than Company I, hence Company R has favorable ratio.
- The cash return on asset of Company R is higher than Company I, hence the Company R has favorable ratio.
- The cash flows to sales of Company R is higher than Company I, hence the Company R has favorable ratio.
- The assets turnover ratio of Company I is higher than Company R, hence the Company I has favorable ratio.
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Chapter 11 Solutions
Financial Accounting
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