Question

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	131,000		$	136,000
Accounts receivable		333,000			483,000
Inventory		577,000			485,000
Plant and equipment, net		889,000			866,000
Investment in Buisson, S.A.		396,000			435,000
Land (undeveloped)		247,000			254,000
Total assets	$	2,573,000		$	2,659,000
Liabilities and Stockholders' Equity
Accounts payable	$	384,000		$	331,000
Long-term debt		1,021,000			1,021,000
Stockholders' equity		1,168,000			1,307,000
Total liabilities and stockholders' equity	$	2,573,000		$	2,659,000

Joel de Paris, Inc. Income Statement
Sales					$	4,290,000
Operating expenses						3,646,500
Net operating income						643,500
Interest and taxes:
Interest expense	$	121,000
Tax expense		195,000				316,000
Net income					$	327,500

The company paid dividends of $188,500 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. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

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

Answer 1

Ans.	Assets	Beginning balance	Ending balance
	Cash	$131,000	$136,000
	Accounts receivables	$333,000	$483,000
	Inventory	$577,000	$485,000
	Plant and equipment	$889,000	$866,000
	Total operating assets	$1,930,000	$1,970,000
	*Undeveloped land and investment in other company are not included in operating assets.
Ans.1	Average operating assets = (Beginning operating assets + Ending operating assets) / 2
		($1,930,000 + $1,970,000) / 2
		$3,900,000 / 2
		$1,950,000
Ans.2 a	Margin =   Net operating income / Sales * 100
	$643,500 / $4,290,000 * 100
	15.00%
Ans.2 b	Turnover = Sales / Average operating assets
	$4,290,000 / $1,950,000
	2.20	times
Ans. 2 c	Return on investment (ROI) =   Turnover * Margin
	2.20 * 15%
	0.33 or 33%
Ans. 3	Residual income =   Operating income - Minimum required income
	$643,500 - $292,500
	$351,000
	*Minimum required income   =   Average operating assets * Desired rate of return
	$1,950,000 * 15%
	$292,500
	*Residual income is the difference between Net operating income and minimum required income, and the
	minimum required income is the product of average operating assets and desired rate of return.