Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	132,000		$	132,000
Accounts receivable		344,000			486,000
Inventory		571,000			484,000
Plant and equipment, net		873,000			858,000
Investment in Buisson, S.A.		396,000			428,000
Land (undeveloped)		253,000			247,000
Total assets	$	2,569,000		$	2,635,000
Liabilities and Stockholders' Equity
Accounts payable	$	388,000		$	334,000
Long-term debt		1,037,000			1,037,000
Stockholders' equity		1,144,000			1,264,000
Total liabilities and stockholders' equity	$	2,569,000		$	2,635,000

Joel de Paris, Inc. Income Statement
Sales					$	4,462,000
Operating expenses						3,703,460
Net operating income						758,540
Interest and taxes:
Interest expense	$	126,000
Tax expense		196,000				322,000
Net income					$	436,540

The company paid dividends of $316,540 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

1.

Operating assets, beginning = Cash + Accounts receivables + Inventory + Plant and equipment
= 132,000 + 344,000 + 571,000 + 873,000
= $1,920,000

Operating assets, ending = Cash + Accounts receivables + Inventory + Plant and equipment
= 132,000 + 486,000 + 484,000 + 858,000
= $1,960,000

Average operating assets = (Operating assets, beginning + Operating assets, ending)/2
= (1,920,000 + 1,960,000)/2
= $1,940,000

2.
Margin = Net operating income/Sales
= 758,540/4,462,000
= 17%

Turnover = Sales/Average operating assets
= 4,462,000/1,940,000
= 2.3

Return on investment = Net operating income/Average operating assets
= 758,540/1,940,000
= 39.1%

3.
Residual income = Net operating income - (Average operating assets x Minimum required rate of return)
= 758,540 - ( 1,940,000 x 15%)
= 758,540 - 291,000

= $467,540