Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance		Ending Balance
Assets
Cash	$	127,000	$	129,000
Accounts receivable		332,000		476,000
Inventory		572,000		488,000
Plant and equipment, net		849,000		827,000
Investment in Buisson, S.A.		396,000		434,000
Land (undeveloped)		245,000		246,000
Total assets	$	2,521,000	$	2,600,000
Liabilities and Stockholders' Equity
Accounts payable	$	376,000	$	331,000
Long-term debt		1,041,000		1,041,000
Stockholders' equity		1,104,000		1,228,000
Total liabilities and stockholders' equity	$	2,521,000	$	2,600,000

   

Joel de Paris, Inc. Income Statement
Sales		$	3,990,000
Operating expenses			3,431,400
Net operating income			558,600
Interest and taxes:
Interest expense	119,000
Tax expense	196,000		315,000
Net income		$	243,600

The company paid dividends of $119,600 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company.

Required:

1. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round your answers to 1 decimal place.)

2. The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 20%. What was the company’s residual income last year?

Net operating income ?

Minimum required income ?

Residual income ?

Answer 1

Ans.1	Margin   = Net operating income / Sales * 100
		558600 / 3990000 * 100
		14%
	Turnover = Sales / Average operating assets
		3990000 / 2560500
		1.6 times
	*Average operating assets = (Beginning total assets + Ending total assets) / 2
		(2521000 + 2600000) / 2
		2560500
	Return on investment = Net operating income / Average operating assets * 100
		558600 / 2560500 * 100
		21.8%
Ans.2	Net operating income	558600
	Less: Minimum required income	-512100
	Residual income	46500
	*Minimum required income = Average operating assets * Minimum required rate of return
			2560500 * 20%
			512100