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.
- 1. Introduction to Accounting1h 21m
- 2. Transaction Analysis1h 13m
- 3. Accrual Accounting Concepts2h 38m
- Accrual Accounting vs. Cash Basis Accounting10m
- Revenue Recognition and Expense Recognition24m
- Introduction to Adjusting Journal Entries and Prepaid Expenses36m
- Adjusting Entries: Supplies12m
- Adjusting Entries: Unearned Revenue11m
- Adjusting Entries: Accrued Expenses12m
- Adjusting Entries: Accrued Revenues6m
- Adjusting Entries: Depreciation16m
- Summary of Adjusting Entries7m
- Unadjusted vs Adjusted Trial Balance6m
- Closing Entries10m
- Post-Closing Trial Balance2m
- 4. Merchandising Operations2h 30m
- Service Company vs. Merchandising Company10m
- Net Sales28m
- Cost of Goods Sold - Perpetual Inventory vs. Periodic Inventory9m
- Perpetual Inventory - Purchases10m
- Perpetual Inventory - Freight Costs9m
- Perpetual Inventory - Purchase Discounts11m
- Perpetual Inventory - Purchasing Summary6m
- Periodic Inventory - Purchases14m
- Periodic Inventory - Freight Costs7m
- Periodic Inventory - Purchase Discounts10m
- Periodic Inventory - Purchasing Summary6m
- Single-step Income Statement4m
- Multi-step Income Statement17m
- Comprehensive Income2m
- 5. Inventory1h 55m
- Merchandising Company vs. Manufacturing Company6m
- Physical Inventory Count, Ownership of Goods, and Consigned Goods10m
- Specific Identification7m
- Periodic Inventory - FIFO, LIFO, and Average Cost23m
- Perpetual Inventory - FIFO, LIFO, and Average Cost31m
- Financial Statement Effects of Inventory Costing Methods10m
- Lower of Cost or Market11m
- Inventory Errors14m
- 6. Internal Controls and Reporting Cash1h 16m
- 7. Receivables and Investments3h 8m
- Types of Receivables8m
- Net Accounts Receivable: Direct Write-off Method5m
- Net Accounts Receivable: Allowance for Doubtful Accounts13m
- Net Accounts Receivable: Percentage of Sales Method9m
- Net Accounts Receivable: Aging of Receivables Method11m
- Notes Receivable25m
- Introduction to Investments in Securities13m
- Trading Securities31m
- Available-for-Sale (AFS) Securities26m
- Held-to-Maturity (HTM) Securities17m
- Equity Method25m
- 8. Long Lived Assets5h 1m
- Initial Cost of Long Lived Assets42m
- Basket (Lump-sum) Purchases13m
- Ordinary Repairs vs. Capital Improvements10m
- Depreciation: Straight Line32m
- Depreciation: Declining Balance29m
- Depreciation: Units-of-Activity28m
- Depreciation: Summary of Main Methods8m
- Depreciation for Partial Years13m
- Retirement of Plant Assets (No Proceeds)14m
- Sale of Plant Assets18m
- Change in Estimate: Depreciation21m
- Intangible Assets and Amortization17m
- Natural Resources and Depletion16m
- Asset Impairments16m
- Exchange for Similar Assets16m
- 9. Current Liabilities2h 19m
- 10. Time Value of Money1h 23m
- 11. Long Term Liabilities2h 45m
- 12. Stockholders' Equity2h 15m
- Characteristics of a Corporation17m
- Shares Authorized, Issued, and Outstanding9m
- Issuing Par Value Stock12m
- Issuing No Par Value Stock5m
- Issuing Common Stock for Assets or Services8m
- Retained Earnings14m
- Retained Earnings: Prior Period Adjustments9m
- Preferred Stock11m
- Treasury Stock9m
- Dividends and Dividend Preferences17m
- Stock Dividends10m
- Stock Splits9m
- 13. Statement of Cash Flows2h 24m
- 14. Financial Statement Analysis5h 25m
- Horizontal Analysis14m
- Vertical Analysis23m
- Common-sized Statements5m
- Trend Percentages7m
- Discontinued Operations and Extraordinary Items6m
- Introduction to Ratios8m
- Ratios: Earnings Per Share (EPS)10m
- Ratios: Working Capital and the Current Ratio14m
- Ratios: Quick (Acid Test) Ratio12m
- Ratios: Gross Profit Rate9m
- Ratios: Profit Margin7m
- Ratios: Quality of Earnings Ratio8m
- Ratios: Inventory Turnover10m
- Ratios: Average Days in Inventory9m
- Ratios: Accounts Receivable (AR) Turnover9m
- Ratios: Average Collection Period (Days Sales Outstanding)8m
- Ratios: Return on Assets (ROA)8m
- Ratios: Total Asset Turnover5m
- Ratios: Fixed Asset Turnover5m
- Ratios: Profit Margin x Asset Turnover = Return On Assets9m
- Ratios: Accounts Payable Turnover6m
- Ratios: Days Payable Outstanding (DPO)8m
- Ratios: Times Interest Earned (TIE)7m
- Ratios: Debt to Asset Ratio5m
- Ratios: Debt to Equity Ratio5m
- Ratios: Payout Ratio5m
- Ratios: Dividend Yield Ratio7m
- Ratios: Return on Equity (ROE)10m
- Ratios: DuPont Model for Return on Equity (ROE)20m
- Ratios: Free Cash Flow10m
- Ratios: Price-Earnings Ratio (PE Ratio)7m
- Ratios: Book Value per Share of Common Stock7m
- Ratios: Cash to Monthly Cash Expenses8m
- Ratios: Cash Return on Assets7m
- Ratios: Economic Return from Investing6m
- Ratios: Capital Acquisition Ratio6m
- 15. GAAP vs IFRS56m
- GAAP vs. IFRS: Introduction7m
- GAAP vs. IFRS: Classified Balance Sheet6m
- GAAP vs. IFRS: Recording Differences4m
- GAAP vs. IFRS: Adjusting Entries4m
- GAAP vs. IFRS: Merchandising3m
- GAAP vs. IFRS: Inventory3m
- GAAP vs. IFRS: Fraud, Internal Controls, and Cash3m
- GAAP vs. IFRS: Receivables2m
- GAAP vs. IFRS: Long Lived Assets5m
- GAAP vs. IFRS: Liabilities3m
- GAAP vs. IFRS: Stockholders' Equity3m
- GAAP vs. IFRS: Statement of Cash Flows5m
- GAAP vs. IFRS: Analysis and Income Statement Presentation5m
Ratios: Capital Acquisition Ratio - Online Tutor, Practice Problems & Exam Prep
The capital acquisitions ratio measures how well operating cash flows cover capital expenditures on fixed assets. It is calculated by dividing cash flow from operating activities by cash spent on property, plant, and equipment. A ratio below 1 indicates insufficient operating cash to cover these costs, potentially requiring financing through debt. Conversely, a higher ratio suggests strong cash generation, allowing for additional investments or reduced reliance on debt. Understanding this ratio is crucial for assessing a company's financial health and investment capacity.
Ratios: Capital Acquisition Ratio
Video transcript
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?