Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	139,000		$	130,000
Accounts receivable		335,000			480,000
Inventory		569,000			486,000
Plant and equipment, net		847,000			834,000
Investment in Buisson, S.A.		406,000			430,000
Land (undeveloped)		252,000			250,000
Total assets	$	2,548,000		$	2,610,000
Liabilities and Stockholders' Equity
Accounts payable	$	376,000		$	331,000
Long-term debt		1,004,000			1,004,000
Stockholders' equity		1,168,000			1,275,000
Total liabilities and stockholders' equity	$	2,548,000		$	2,610,000

Joel de Paris, Inc. Income Statement
Sales					$	4,775,000
Operating expenses						4,154,250
Net operating income						620,750
Interest and taxes:
Interest expense	$	123,000
Tax expense		194,000				317,000
Net income					$	303,750

The company paid dividends of $196,750 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?

Answer 1

Ans:

1. Company Average Operating Assets= Beginning Operating Assets+ Closing operating assets/2

Operating Assets= Total Assets- Land(undeveloped)-Investment in Buisson, S.A.

Beginning operating assets= 2,548,000-406,000-252,000

beginning Operating assets= 1,890,000

Closing operating assets= 2,610,000-430,000-250,000

Closing operating assets= 1,930,000

Average operating Assets= 1,890,000+1,930,000/2

=> 1,910,000

2. Margin= Net operating income/sales

margin= 303,750/4,775,000*100

=> 6.36%

Turnover= Sales/average operating assets

=> 4,775,000/1,910,000

=> 2.50 times

Return on investment= Margin* turnover

=> 6.36*2.50

=> 15.90%

3. Company residual income =net operating Income-{Average operating assets*rate of return}

=> 303,750-(1,910,000*15%)

=> 303,750- 286,500

=> $17,250