Question

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

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?

Homework Answers

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

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