Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	131,000		$	126,000
Accounts receivable		331,000			485,000
Inventory		574,000			489,000
Plant and equipment, net		894,000			870,000
Investment in Buisson, S.A.		405,000			432,000
Land (undeveloped)		248,000			248,000
Total assets	$	2,583,000		$	2,650,000
Liabilities and Stockholders' Equity
Accounts payable	$	377,000		$	337,000
Long-term debt		1,044,000			1,044,000
Stockholders' equity		1,162,000			1,269,000
Total liabilities and stockholders' equity	$	2,583,000		$	2,650,000

Joel de Paris, Inc. Income Statement
Sales					$	5,070,000
Operating expenses						4,410,900
Net operating income						659,100
Interest and taxes:
Interest expense	$	118,000
Tax expense		204,000				322,000
Net income					$	337,100

The company paid dividends of $230,100 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. (Do not round intermediate calculations and round your final answers 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

Operating assets are those assets acquired for use in the conduct of the ongoing operations of a business; this means assets that are needed to generate revenue. Assets not considered to be operating assets are those used for long-term investment purposes, such as marketable securities. Assets no longer used for operations, such as assets held for sale, are also not considered to be operating assets. Further, a non-cash asset that is held for investment purposes, such as an investment property, is not considered an operating asset

Assets	At the beginning in $	At the end in $
Total asset	2583000	2650000
Less :
Investment in Buisson	405000	432000
Land ( Undeveloped)	248000	248000
Operating Assets	1930000	1970000

1) Average Operating Asset = (Begining operating asset + ending operating asset)/2

=(1930000+1970000)/2

= $1950000

2) turnover = sales/ average operating Asset

= 5070000/ 1950000

= 2.6

Margin = Net Operating Income / Total Sales

= 659100/5070000

= 13%

ROI = Margin * Turnover

= 13% *2.6

= 33.8

3) the company has a minimum required rate of 15%

Residual Income = Controllable Margin - (Required Return × Average Operating Assets)

= 659100 -(1950000*15%)

= 659100- 292500

= $ 366600