Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	138,000		$	129,000
Accounts receivable		341,000			477,000
Inventory		561,000			488,000
Plant and equipment, net		810,000			796,000
Investment in Buisson, S.A.		398,000			426,000
Land (undeveloped)		248,000			250,000
Total assets	$	2,496,000		$	2,566,000
Liabilities and Stockholders' Equity
Accounts payable	$	377,000		$	334,000
Long-term debt		1,033,000			1,033,000
Stockholders' equity		1,086,000			1,199,000
Total liabilities and stockholders' equity	$	2,496,000		$	2,566,000

Joel de Paris, Inc. Income Statement
Sales					$	4,114,000
Operating expenses						3,579,180
Net operating income						534,820
Interest and taxes:
Interest expense	$	113,000
Tax expense		198,000				311,000
Net income					$	223,820

The company paid dividends of $110,820 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

Operating assets do not include investments in other companies or in undeveloped land.

1)

	Beginning Balances	Ending Balances
Cash	$	138,000	$	129,000
Accounts receivable		341,000		477,000
Inventory		561,000		488,000
Plant and equipment (net)		810,000		796,000
Total operating assets	$	1,850,000	$	1,890,000

Average operating assets	=	$1,850,000 + $1,890,000	=	$1,870,000
2

Margin	=	Net operating income
Sales

	=	$534820	=	13.00%
$4,114,000

Turnover	=	Sales
Average operating assets

	=	$4,114,000	=	2.20
$1,870,000

ROI

=

Margin × Turnover

=

13.00% × 2.20 = 28.60%

2.

Minimum required return (15% × $1,870,000) = $280500

3.

Residual income

= 534820+280500 = $815320