Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	130,000		$	139,000
Accounts receivable		344,000			486,000
Inventory		565,000			473,000
Plant and equipment, net		821,000			802,000
Investment in Buisson, S.A.		401,000			431,000
Land (undeveloped)		249,000			250,000
Total assets	$	2,510,000		$	2,581,000
Liabilities and Stockholders' Equity
Accounts payable	$	384,000		$	346,000
Long-term debt		1,008,000			1,008,000
Stockholders' equity		1,118,000			1,227,000
Total liabilities and stockholders' equity	$	2,510,000		$	2,581,000

Joel de Paris, Inc. Income Statement
Sales					$	5,076,000
Operating expenses						4,416,120
Net operating income						659,880
Interest and taxes:
Interest expense	$	119,000
Tax expense		191,000				310,000
Net income					$	349,880

The company paid dividends of $240,880 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

Answer-

Answer- 1)-The company average operating assets for last year was =$1930000.

Explanation- Calculation of average operating assets = (Opening operating assets+ Closing operating assets)/2

=($130000+$344000+$565000+$821000)+($139000+$486000+$473000+$802000)/2

=($1860000+$1900000)/2

= $1880000

Operating assets = Cash+ Accounts receivable+ Inventory+ Plant & equipment, net

2)- Margin – (Net operating income /Sales)*100

= ($659880/$5076000)*100

= 13%

Turnover = Sales/ Average operating assets

= $5076000/$1880000

=2.7

Return on investment = Margin*Turnover

= 13%*2.7

= 35.1%

3)- Residual income for the last year = $377880.

Explanation-

Residual income =Operating income –(Average operating assets*Required rate of return)

= $659880-($1880000*15%)

= $659880-$282000

= $377880