Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	133,000		$	131,000
Accounts receivable		342,000			480,000
Inventory		575,000			471,000
Plant and equipment, net		790,000			798,000
Investment in Buisson, S.A.		391,000			435,000
Land (undeveloped)		253,000			255,000
Total assets	$	2,484,000		$	2,570,000
Liabilities and Stockholders' Equity
Accounts payable	$	389,000		$	334,000
Long-term debt		951,000			951,000
Stockholders' equity		1,144,000			1,285,000
Total liabilities and stockholders' equity	$	2,484,000		$	2,570,000

Joel de Paris, Inc. Income Statement
Sales					$	4,278,000
Operating expenses						3,507,960
Net operating income						770,040
Interest and taxes:
Interest expense	$	121,000
Tax expense		193,000				314,000
Net income					$	456,040

The company paid dividends of $315,040 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?

Complete the Following:

- Average Operating Assets:

- Margin : %

- Turnover

- ROI - %

- Residual Income

Answer 1

1. Average Operating Assets = $ 1,860,000.

	Beginning Balance	Ending Balance
Cash	$ 133,000	$ 131,000
Accounts Receivable	342,000	480,000
Inventory	575,000	471,000
Plant and Equipment, net	790,000	798,000
Totals	$ 1,840,000	$ 1,880,000

Average operating assets = $ ( 1,840,000 + 1,880,000) / 2 = $ 1,860,000

2. Margin = Net Operating Income / Sales = $ 770,040 / $ 4,278,000 * 100 = 18 %

Turnover = Sales / Average Operating Assets = $ 4,278,000 / $ 1,860,000 = 2.3

ROI = Margin x Turnover = 18 % x 2.3 = 41.40 %

3. Residual Income last year = Net Operating Income - Minimum Required Return = $ 770,040 - $ ( 1,860,000 x 15 %) = $ 491,040.