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	$	136,000
Accounts receivable		348,000		477,000
Inventory		560,000		489,000
Plant and equipment, net		793,000		778,000
Investment in Buisson, S.A.		406,000		435,000
Land (undeveloped)		252,000		250,000
Total assets	$	2,498,000	$	2,565,000
Liabilities and Stockholders' Equity
Accounts payable	$	386,000	$	346,000
Long-term debt		956,000		956,000
Stockholders' equity		1,156,000		1,263,000
Total liabilities and stockholders' equity	$	2,498,000	$	2,565,000

   

Joel de Paris, Inc. Income Statement
Sales		$	5,022,000
Operating expenses			4,369,140
Net operating income			652,860
Interest and taxes:
Interest expense	130,000
Tax expense	194,000		324,000
Net income		$	328,860

The company paid dividends of $221,860 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company.

Required:

1. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round your answers to 1 decimal place.)

2. The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 17%. What was the company’s residual income last year?

Answer 1

Answer:-1)-

Margin =( Net operating income/Net Sales)*100

=($652860/$5022000)*100 =13%

Turnover=Net sales/Average operating assets

=$5022000/$1860000 =2.7

ROI = Margin*Turnover

=13%*2.7 =35.1%

Average operating assets =($1840000+$1880000)/2

=$1860000

Explanation:-

Calculation of company's average operating assets for the year
Particulars	Ending Balance	Beginning Balance
Cash	139000	136000
Accounts Receivable	348000	477000
Inventory	560000	489000
Plant & Equipment, net	793000	778000
Total Operating assets	1840000	1880000

2)-

Residual income= Net Operating income – (Average operating assets* Minimum required rate of return)

                      North   = $652860 –($1860000*17%)

                                   = $652860 - $316200

                                   = $336660