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 $ 127,000 Accounts receivable 343,000 485,000 Inventory 565,000 485,000 Plant and equipment, net 863,000 853,000 Investment in Buisson, S.A. 395,000 434,000 Land (undeveloped) 253,000 252,000 Total assets $ 2,558,000 $ 2,636,000 Liabilities and Stockholders' Equity Accounts payable $ 378,000 $ 338,000 Long-term debt 967,000 967,000 Stockholders' equity 1,213,000 1,331,000 Total liabilities and stockholders' equity $ 2,558,000 $ 2,636,000 Joel de Paris, Inc. Income Statement Sales $ 4,439,000 Operating expenses 3,861,930 Net operating income 577,070 Interest and taxes: Interest expense $ 114,000 Tax expense 196,000 310,000 Net income $ 267,070 The company paid dividends of $149,070 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.Company's average operating assets for last year-
Operating assets are used to generate revenues for the business and acquired to perform the operations of the business
Operating Assets	Beginning Balance	Ending Balance
Cash	139000	127000
Accounts Receivable	343000	485000
Inventory	565000	485000
Plant & Equipment (net)	863000	853000
TOTAL	1910000	1950000
*Investment in Buisson, S.A, Land ( Undeveloped) are non- operating Assets)
Average Operating Assets = ( Beginning Balance + Ending Balance) ÷ 2
(1910000+1950000) ÷ 2
1930000
2.The company’s margin, turnover, and return on investment (ROI) for last year-
Profit Margin = (Net Income ÷ Total Sales)*100
=(267070 ÷ 4439000)*100
=6.02%
Turnover
* It is Assumed that the question asks for asset turnover for last year
Asset Turnover= Net Sales ÷ Average Total Assets
Average Total Assets= (2558000+2636000)/2 = 2597000
Asset Turnover= 4439000 ÷ 2597000 = 1.71 times
Return on Investment =(Net Profit/ Total Cost of Investment)*100
=(267070/2636000)*100
=10.13%
3.The company’s residual income last year-
[Residual income is the amount left after paying the cost . It is used to evaluate the performance of the business unit]
Residual Income= Operating Income - (Minimum Required rate of return * Operating Assets )
=577070 - (0.15*1950000)
284570