Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	140,000		$	120,000
Accounts receivable		450,000			530,000
Inventory		320,000			380,000
Plant and equipment, net		680,000			620,000
Investment in Buisson, S.A.		250,000			280,000
Land (undeveloped)		180,000			170,000
Total assets	$	2,020,000		$	2,100,000
Liabilities and Stockholders' Equity
Accounts payable	$	360,000		$	310,000
Long-term debt		1,500,000			1,500,000
Stockholders' equity		160,000			290,000
Total liabilities and stockholders' equity	$	2,020,000		$	2,100,000

Joel de Paris, Inc. Income Statement
Sales					$	4,050,000
Operating expenses						3,645,000
Net operating income						405,000
Interest and taxes:
Interest expense	$	150,000
Tax expense		110,000				260,000
Net income					$	145,000

The company paid dividends of $15,000 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 "Turnover" to 1 decimal place.)

3. What was the company’s residual income last year?

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

Answer 1

1.

	Beginning balance	Ending balance
Cash	$140,000	$120,000
Accounts receivables	$450,000	$530,000
Inventory	$320,000	$380,000
Plant and equipment, net	$680,000	$620,000
Total operating assets	$1,590,000	$1,650,000

In the given question, Investment in Buisson, S.A. and Land ( Undeveloped ) are not an operating asset, because they do not contribute anything in the main operating activities of the company.

Average operating assets = [ Beginning total operating assets + Ending total operating assets ] / 2 = [ $1,590,000 + $1,650,000 ] / 2 = $1,620,000

2. Margin = Net operating income / Sales = $405,000 / $4,050,000 = 10%

Turnover = Sales / Average operating assets = $4,050,000 / $1,620,000 = 2.5

Return on investment ( ROI ) = Net operating income / Average operating assets = $405,000 / $1,620,000 = 25%

3. Residual income = Net operating income - ( Average operating assets * Minimum required rate of return ) = $405,000 - ( $1,620,000 * 15% ) = $162,000