Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	126,000		$	126,000
Accounts receivable		330,000			486,000
Inventory		564,000			475,000
Plant and equipment, net		900,000			873,000
Investment in Buisson, S.A.		399,000			433,000
Land (undeveloped)		252,000			253,000
Total assets	$	2,571,000		$	2,646,000
Liabilities and Stockholders' Equity
Accounts payable	$	373,000		$	331,000
Long-term debt		993,000			993,000
Stockholders' equity		1,205,000			1,322,000
Total liabilities and stockholders' equity	$	2,571,000		$	2,646,000

Joel de Paris, Inc. Income Statement
Sales					$	5,044,000
Operating expenses						4,388,280
Net operating income						655,720
Interest and taxes:
Interest expense	$	128,000
Tax expense		203,000				331,000
Net income					$	324,720

The company paid dividends of $207,720 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.

	Beginning Balances	Ending Balances
Cash	126000	126000
Accounts receivable	330000	486000
Inventory	564000	475000
Plant and equipment (net)	900000	873000
Total operating assets	1920000	1960000

Average operating assets = ($1920000 + $1960000) / 2

= $19,40,000

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

Margin        = Net operating income / Sales

                    = $6,55,720 / $50,44,000

                   = 13%

Turnover    =Sales / Average operating assets

                   = $50,44,000 / $19,40,000

                   = 2.6

ROI = Margin × Turnover

= 13% x 2.60

= 33.8%

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

Net operating income                        $6,55,720  

Less : Minimum required return        $2,91,000

($19,40,000 x 15%)

Residual income $3,64,720