Question

Financial data for Joel de Paris, Inc., for last year follow:

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	140,000		$	128,000
Accounts receivable		339,000			489,000
Inventory		561,000			474,000
Plant and equipment, net		870,000			859,000
Investment in Buisson, S.A.		393,000			432,000
Land (undeveloped)		254,000			253,000
Total assets	$	2,557,000		$	2,635,000
Liabilities and Stockholders' Equity
Accounts payable	$	389,000		$	332,000
Long-term debt		1,018,000			1,018,000
Stockholders' equity		1,150,000			1,285,000
Total liabilities and stockholders' equity	$	2,557,000		$	2,635,000

Joel de Paris, Inc. Income Statement
Sales					$	3,860,000
Operating expenses						3,203,800
Net operating income						656,200
Interest and taxes:
Interest expense	$	120,000
Tax expense		200,000				320,000
Net income					$	336,200

The company paid dividends of $201,200 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. The company's minimum required rate of return of 15%.

Required:

1. Compute the company's average operating assets for last year.

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round "Margin", "Turnover" and "ROI" to 2 decimal places.)

3. What was the company’s residual income last year?

1. Average operating assets ______

2. Margin ________%

Turnover _______

ROI ______%

3. Residual income________

Answer 1

Answer- 1)-The company average operating assets for last year was =$1930000.

Explanation- Calculation of average operating assets = (Opening operating assets+ Closing operating assets)/2

=($140000+$339000+$561000+$870000)+($128000+$489000+$474000+$859000)/2

=($1910000+$1950000)/2

=$1930000

Operating assets = Cash+ Accounts receivable+ Inventory+ Plant & equipment, net

2)- Margin – (Net operating income /Sales)*100

= ($656200/$3860000)*100

= 17%

Turnover = Sales/ Average operating assets

= $3860000/$1930000

= 2

Return on investment = Margin*Turnover

= 17%*2

= 34%

3)- Residual income for the last year = $366700.

Explanation-Residual income =Operating income –(Average operating assets*Required rate of return)

= $656200-($1930000*15%)

= $656200-$289500

= $366700