P5. Use the financial information below to calculate and interpret the following ratios: A) Capital acquisitions ratio. B) Quality of income ratio. Solution A) Capital acquisitions ratio The capital acquisition ratio reflects the company\'s ability to finance capital expenditures from internal sources. A ratio of less than 1 indicates that capital acquisitions are draining more cash from the business than they are generating revenues. Capital Acquisition Ratio = (cash flow from operations - dividends) / cash paid for acquisitions. B) Quality of income ratio It is a tool to evaluate a business\' earnings performance. The ratio shows the percentage of earnings that have been actualized in cash. A high ratio is desirable because it indicates a large amount of earnings turning into profits. Quality of income = Cash flow from operating activities / Net income .

1. P5. Use the financial information below to calculate and interpret the following ratios:
A) Capital acquisitions ratio.
B) Quality of income ratio.
Solution
A) Capital acquisitions ratio
The capital acquisition ratio reflects the company's ability to finance capital expenditures from
internal sources. A ratio of less than 1 indicates that capital acquisitions are draining more cash
from the business than they are generating revenues.
Capital Acquisition Ratio = (cash flow from operations - dividends) / cash paid for acquisitions.
B) Quality of income ratio
It is a tool to evaluate a business' earnings performance. The ratio shows the percentage of
earnings that have been actualized in cash. A high ratio is desirable because it indicates a large
amount of earnings turning into profits.
Quality of income = Cash flow from operating activities / Net income
Quality of income = Cash flow from operating activities / Net income