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		$	128,000
Accounts receivable		338,000			480,000
Inventory		561,000			485,000
Plant and equipment, net		845,000			817,000
Investment in Buisson, S.A.		392,000			434,000
Land (undeveloped)		255,000			252,000
Total assets	$	2,517,000		$	2,596,000
Liabilities and Stockholders' Equity
Accounts payable	$	382,000		$	344,000
Long-term debt		1,016,000			1,016,000
Stockholders' equity		1,119,000			1,236,000
Total liabilities and stockholders' equity	$	2,517,000		$	2,596,000

Joel de Paris, Inc. Income Statement
Sales					$	5,292,000
Operating expenses						4,498,200
Net operating income						793,800
Interest and taxes:
Interest expense	$	125,000
Tax expense		192,000				317,000
Net income					$	476,800

The company paid dividends of $359,800 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?

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

Answer 1

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

	Beginning Balances	Ending Balances
Cash	126000	128000
Accounts receivable	338000	480000
Inventory	561000	485000
Plant and equipment (net)	845000	817000
Total operating assets	1870000	1910000

Average operating assets = ($1870000 + $1910000) / 2

= $18,90,000

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

Margin        = Net operating income / Sales

                    = $793800 / 5,292,000

                   = 15%

Turnover              =Sales / Average operating assets

                             = 5,292,000 / 1890000

                             = 2.80

ROI = Margin × Turnover= 15% x 2.80 = 42%

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

Net operating income                                 $793800   

Less : Minimum required return                 $283500

($1890000 x 15%)

Residual income                                        $5,10,300

1	Average operating assets	$18,90,000
2	Margin	15%
	Turnover	2.80
	ROI	42%
3	Residual income	$5,10,300