Question

Beaker Company

Statements of Financial Position

Beginning Balance Ending Balance

Assets:

Cash $ 256,000 $ 231,240

Accounts receivable 144,000 192,000

Inventory 310,000 240,000

Plant and equipment (net) 492,000 445,000

Investment in Cedar Company 301,000 286,000

Land (undeveloped) 280,000 280,000

Total assets $ 1,783,000 $ 1,674,240

Liabilities and owners' equity:

Accounts payable $ 214,000 $ 238,000

Long-term debt 810,000 810,000

Owners' equity 759,000 626,240

Total liabilities and owners' equity $ 1,783,000 $ 1,674,240

Beaker Company

Income Statement

Sales $ 2,060,000

Less operating expenses 1,854,000

Net operating income 206,000

Less interest and taxes:

Interest expense $ 96,900

Tax expense 63,860 160,760

Net income $ 45,240

The company paid dividends of $178,000 last year. The "Investment in Cedar Company" on the statement of financial position represents an investment in the stock of another company.

Additionally; The Board of Directors of Beaker Company has set a minimum required return of 15%.

Please calulate the following:

1. Average Operating Assets (rounded to the nearest whole dollar)

2. Operating Income (rounded to the nearest whole dollar)

3. Sales (rounded to the nearest whole dollar)

4. Margin (rounded to 2 decimal places)

5. Turnover (rounded to 2 decimal places)

6. Return On Investment (rounded to 2 decimal places)

7. Residual Income (rounded to the nearest whole dollar)

Answer 1

Beaker Company

1. Calculation of average operating assets:

Average operating assets = (beginning balance of operating assets +ending balance of operating assets)/2

Operating assets = cash + accounts receivable + inventory + plant and equipment

	Average Operating Assets
	Beg. Balance	Ending Balance
Cash	$256,000	$231,240
Accounts Receivable	$144,000	$192,000
Inventory	$310,000	$240,000
Plant and Equipment, net	$492,000	$445,000
Totals	$1,202,000	$1,108,240

Beg. Balance = $1,202,000

Ending balance = $1,108,240

Average operating assets = (1,202,000 + 1,108,240)/2

Average operating assets = $1,155,120

1. Operating income = $206,000
2. Sales = $2,060,000
3. Margin = (206,000/2,060,000) x 100 = 10%
4. Turnover = sales/average operating assets

= $2,060,000/$1,155,120 = 1.78

1. ROI = margin x turnover

= 10% x 1.78 = 17.8%

1. Residual income (minimum rate of return is 15%)

Minimum return on average operating assets = 15% x 1,155,120 = $173,268

Residual income = net operating income – minimum return

= 206,000 – 173,268 = $32,732