Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	127,000		$	139,000
Accounts receivable		346,000			489,000
Inventory		561,000			474,000
Plant and equipment, net		836,000			808,000
Investment in Buisson, S.A.		407,000			432,000
Land (undeveloped)		254,000			252,000
Total assets	$	2,531,000		$	2,594,000
Liabilities and Stockholders' Equity
Accounts payable	$	386,000		$	338,000
Long-term debt		1,021,000			1,021,000
Stockholders' equity		1,124,000			1,235,000
Total liabilities and stockholders' equity	$	2,531,000		$	2,594,000

Joel de Paris, Inc. Income Statement
Sales					$	4,347,000
Operating expenses						3,738,420
Net operating income						608,580
Interest and taxes:
Interest expense	$	126,000
Tax expense		193,000				319,000
Net income					$	289,580

The company paid dividends of $178,580 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	$18,90,000
2	Margin	14%
	Turnover	2.30
	ROI	32.20%
3	Residual income	$3,25,080

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

	Beginning Balances	Ending Balances
Cash	127000	139000
Accounts receivable	346000	489000
Inventory	561000	474000
Plant and equipment (net)	836000	808000
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)*100

                    = ($608580 / $4347000)*100

                   = 14%

Turnover    =Sales / Average operating assets

                   = $4347000 / 1890000

                   = 2.30

ROI = Margin × Turnover= 14% x 2.3 = 32.2%

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

Net operating income                                 $608580

Less : Minimum required return                 $283500

($1890000 x 15%)

Residual income                                        $3,25,080