Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	132,000		$	133,000
Accounts receivable		338,000			481,000
Inventory		564,000			480,000
Plant and equipment, net		806,000			786,000
Investment in Buisson, S.A.		397,000			431,000
Land (undeveloped)		246,000			254,000
Total assets	$	2,483,000		$	2,565,000
Liabilities and Stockholders' Equity
Accounts payable	$	374,000		$	347,000
Long-term debt		1,011,000			1,011,000
Stockholders' equity		1,098,000			1,207,000
Total liabilities and stockholders' equity	$	2,483,000		$	2,565,000

Joel de Paris, Inc. Income Statement
Sales					$	4,650,000
Operating expenses						3,952,500
Net operating income						697,500
Interest and taxes:
Interest expense	$	125,000
Tax expense		192,000				317,000
Net income					$	380,500

The company paid dividends of $271,500 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?

Answer 1

1) Average Operating Assets: Operating Assets includes cash, Accounts Receivable, Inventory, Prepaid Expenses and Fixed Assets. So here we take only Cash, Accounts Receivable, Inventory, Plant and Equiment. Undevelope Land and investment in Buisson is npt considered for calulating Average operating Assets.

Average Opertaing Assets = (Opening Balances + Ending balances) / 2

= ($1,840,000 + $1,880,000) / 2

Average Operating Assets = $1,860,000

2) Company's Margin = (Net Operating Income / Sales ) * 100

= ($697,500 / $4,650,000) * 100

Company's Margin = 15%

Turnover = Sales / Average Operating Assets

= $4,650,000 / $1,860,000

Turnover = 2.5

Return on Investment (ROI) = Turnover * Margin

= 2.5 * 15%

Return on Investment (ROI) = 37.5%

3) Residual Income = Net Operating Income- Minimum Required Return

Minimum Required Return = Average Operating Assets * Required rate of Return

= $1,860,000 * 15%

Minimum Required Return = $279,000

Residual Income = Net Operating Income- Minimum Required Return

= $697,500 - $279,000

Residual Income = $ 418,500