Which of the following best describes how 'cash flow on total assets' is computed?

• A. Operating Cash Flow divided by Average Total Assets
• B. Net Income divided by Total Assets
• C. Operating Cash Flow divided by Total Liabilities
• D. Net Sales divided by Average Total Assets

Answer: (A)

Verified step by step guidance

1. Understand the concept of 'cash flow on total assets': This ratio measures how efficiently a company generates cash flow from its total assets. It is a key indicator of financial performance and operational efficiency.
2. Identify the correct formula for 'cash flow on total assets': The formula is Operating Cash Flow divided by Average Total Assets. This ratio focuses on cash flow rather than net income or sales, making it a more direct measure of liquidity and operational efficiency.
3. Clarify the components of the formula: Operating Cash Flow is the cash generated from a company's core business operations, found in the cash flow statement. Average Total Assets is calculated by averaging the total assets at the beginning and end of the period, which can be found on the balance sheet.
4. Compare the incorrect options: Net Income divided by Total Assets measures profitability, not cash flow efficiency. Operating Cash Flow divided by Total Liabilities focuses on debt coverage, not asset efficiency. Net Sales divided by Average Total Assets measures asset turnover, not cash flow generation.
5. Conclude that the correct computation for 'cash flow on total assets' is Operating Cash Flow divided by Average Total Assets, as it directly relates to the efficiency of generating cash flow from the company's assets.