Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	135,000		$	128,000
Accounts receivable		345,000			472,000
Inventory		561,000			476,000
Plant and equipment, net		819,000			824,000
Investment in Buisson, S.A.		407,000			430,000
Land (undeveloped)		252,000			252,000
Total assets	$	2,519,000		$	2,582,000
Liabilities and Stockholders' Equity
Accounts payable	$	381,000		$	345,000
Long-term debt		980,000			980,000
Stockholders' equity		1,158,000			1,257,000
Total liabilities and stockholders' equity	$	2,519,000		$	2,582,000

Joel de Paris, Inc. Income Statement
Sales					$	4,700,000
Operating expenses						4,089,000
Net operating income						611,000
Interest and taxes:
Interest expense	$	125,000
Tax expense		190,000				315,000
Net income					$	296,000

The company paid dividends of $197,000 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 "Margin", "Turnover" and "ROI" to 2 decimal places.)

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

Answer 1

1. Compute the company's average operating assets for last year.

	Ending Balance	Beginning Balance
Cash	135,000	128,000
Accounts receivable	345,000	472,000
Inventory	561,000	476,000
Plant and equipment, net	819,000	824,000
Total Operating Assets	1,860,000	1,900,000

Average Operating Assets

=1860,000+1,900,000 /2

=3,760,000/2

=1,880,000

Average Operating Assets =1,880,000

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2. Compute the company’s margin, turnover, and return on investment (ROI) for last year

Margin

= Net Operating Income / Net sales

=611,000 /4,700,000

=13%

Turnover

=Net sales / Average Operating Assets

=4,700,000/1,880,000

=2.5

ROI = Margin x Turnover

ROI =13% x 2.5

ROI=32.5%

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

Net Operating Income	611,000
Minimum required return (15% x 1,880,000)	282000
Residual Income (296000-282000)	329000

Residual Income=$329,000

Average Operating Assets	1880000
Margin	13.00%
Turnover	2.5
ROI	32.50%
Residual Income	329000