Question

Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2]

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	134,000		$	135,000
Accounts receivable		340,000			490,000
Inventory		572,000			481,000
Plant and equipment, net		874,000			854,000
Investment in Buisson, S.A.		394,000			428,000
Land (undeveloped)		252,000			245,000
Total assets	$	2,566,000		$	2,633,000
Liabilities and Stockholders' Equity
Accounts payable	$	371,000		$	349,000
Long-term debt		1,032,000			1,032,000
Stockholders' equity		1,163,000			1,252,000
Total liabilities and stockholders' equity	$	2,566,000		$	2,633,000

Joel de Paris, Inc. Income Statement
Sales					$	5,238,000
Operating expenses						4,557,060
Net operating income						680,940
Interest and taxes:
Interest expense	$	117,000
Tax expense		208,000				325,000
Net income					$	355,940

The company paid dividends of $266,940 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?

1.	Average operating assets
2.	Margin		%
	Turnover
	ROI		%
3.	Residual income

Answer 1

1)
Average operating assets = ( ending balances + beginning balances )/2
			(1,960,000+1,920,000)/2
			1940000
2)	Margin = net operating income/sales
	Turnover = sales/average operating assets
	ROI          = margin * turnover
	Margin		13.0%
	turnover		2.70
	ROI		35.1%
	total operating assets don't include investments in other companies or in undeveloped
	land
					ending	Beginning
					balances	balances
	Cash				135,000	134,000
	account receivable				490,000	340,000
	inventory				481,000	572,000
	plant and equipment,net				854,000	874,000
	total Assets				1,960,000	1,920,000
	Average operating assets = ( ending balances + beginning balances )/2
				(1,960,000+1,920,000)/2
				1940000
3)	Net operating income				680,940
	minimum required return				15%
	residual income				389940
	Residual income =net operating income - (average operating assets *min required return)