Financial Accounting

Learn the toughest concepts covered in your Financial Accounting class with step-by-step video tutorials and practice problems.

14. Financial Statement Analysis

Ratios: Capital Acquisition Ratio



Ratios: Capital Acquisition Ratio

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All right, let's check out another ratio here. The capital acquisitions ratio. So the capital acquisitions ratio here, we're gonna be dealing with the capital acquisitions. So this is money that we spend on fixed assets and we want to know how much of our operating cash flows. So the money we, the cash that we bring in from our operations, how much of that can cover these fixed asset purchases. Alright, so let's look at our ratio right here in our numerator, we've got the cash flow from operating activities. This comes from the statement of cash flows, That's where we're gonna find this number. Remember our statement of cash flows? It shows us three sections. The first is the operating section, which shows the cash generated from operations. We're gonna have inflows and outflows from operations. Well, that's gonna be our numerator here. The next section on our statement of cash flows, the investing section. And this is inflows and outflows from fixed assets from long term assets, buying and selling of these long term assets. And then the last section, the financing section. Well, that's where we're dealing with our debt holders, like the bank or bondholders as well as our equity, our shareholders. Right? So when we pay dividends or where we raise money from stock, that's all going to be in the financing section. So we're focused here on those operating cash flows. And then we want to know the cash we paid from for our property plant and equipment, those fixed assets. Right? And this also comes from the statement of cash flows, but it's not just the entire investing section, we wanna dive in there and see what out of the investing section where we were paying cash for fixed assets. Okay. Now, generally when you do that, when you do this ratio, you're not gonna have to be diving into a statement of cash flows, they're just gonna give you the numbers and you just calculate the ratio. So how do we analyze this? What is this ratio really telling us, it's telling us how many times are operating cash flows could cover the cost of these capital expenditures, these costs of fixed assets, Right. When we buy fixed assets were probably trying to expand our business or maybe it's our our machineries deteriorating and we need to buy new ones to keep our business going well, we would hope that our operations would be able to generate enough cash to cover these expenditures. Right now, it might not always be the case, right? Um, this, this could be a case where maybe we need, maybe we're buying so many fixed assets that we're trying to expand our business, right? And maybe it's more than our operations can handle, but we're expecting to expand and be able to generate even more cash in the future. So, when we have a ratio below one, well, when we have a ratio below one, that means that we couldn't cover all of our capital expenditures with just operating cash flows, right? That means we're gonna have to finance these, these fixed assets with other sources. Maybe we're gonna have to take on new debt to finance these assets. Right? So the higher we get the ratio. Well, that's that means we're able to cover this these capital expenditures and have money available for other activities. Okay. And we'll have less of a need to take on debt. So this is a pretty straightforward ratio, especially in a multiple choice question. So let's go ahead and dive into some practice problems.

ABC Company’s statement of cash flows indicated net cash provided/(used) in operating, investing, and financing activities as $140,000, ($80,000), and $25,000, respectively. If the cash flows from investing activities included the purchase of land for $100,000 and the sale of machinery for $20,000, what is the company’s capital acquisitions ratio?


XYZ Company had a capital acquisitions ratio of 3.50. During the period, XYZ purchased equipment with a price of $60,000. If the company had cash inflows from investing activities of $90,000 and cash outflows from financing activities of $30,000, what is the company’s cash flow from operating activities?