Alright. Let's check out another ratio here, the capital acquisitions ratio. So the capital acquisitions ratio here, we're going to 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 going to find this number. Remember, our statement of cash flow shows us three sections. The first is the operating section, which shows the cash generated from operations. We are going to have inflows and outflows from operations. Well, that's going to be our numerator here. The next section on our statement of cash flows is 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 are dealing with our debt holders like the bank or bond holders, as well as our equity, our shareholders, right? So when we pay dividends or 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 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 want to 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 this ratio, you're not going to have to be diving into a statement of cash flows. They're just going to 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 our operating cash flows could cover the cost of these capital expenditures. These cost of fixed assets, right? When we buy fixed assets, we're probably trying to expand our business or maybe it's our machinery 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? This could be a case where 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 1, well when we have a ratio below 1, that means that we couldn't cover all of our capital expenditures with just operating cash flows, right? That means we're going to have to finance these fixed assets with other sources. Maybe we're going to have to take on new debt to finance these assets, right? So the higher we get the ratio, well that means we're able to cover 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.
14. Financial Statement Analysis
Ratios: Capital Acquisition Ratio
14. Financial Statement Analysis
Ratios: Capital Acquisition Ratio - Online Tutor, Practice Problems & Exam Prep
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concept
Ratios: Capital Acquisition Ratio
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Video transcript
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Problem
ProblemABC 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?
A
0.85
B
1.40
C
1.65
D
1.75
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Problem
ProblemXYZ 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?
A
$105,000
B
$210, 000
C
$315,000
D
$420,000