Question

Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash $ 133,000 $ 129,000 Accounts receivable 331,000 475,000 Inventory 565,000 485,000 Plant and equipment, net 891,000 871,000 Investment in Buisson, S.A. 404,000 430,000 Land (undeveloped) 252,000 251,000 Total assets $ 2,576,000 $ 2,641,000 Liabilities and Stockholders' Equity Accounts payable $ 374,000 $ 337,000 Long-term debt 1,025,000 1,025,000 Stockholders' equity 1,177,000 1,279,000 Total liabilities and stockholders' equity $ 2,576,000 $ 2,641,000 Joel de Paris, Inc. Income Statement Sales $ 5,238,000 Operating expenses 4,557,060 Net operating income 680,940 Interest and taxes: Interest expense $ 120,000 Tax expense 206,000 326,000 Net income $ 354,940 The company paid dividends of $252,940 last year. The “Investment in Buisson, S.A.,” on the balance sheet represents an investment in the stock of another company. Required: 1. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round your Turnover answer to 1 decimal place. Round your Margin and ROI percentage answers to 1 decimal place (i.e 0.123 should be entered as 12.3.)) 2. The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 15%. What was the company’s residual income last year?

Answer 1

Requirement – 1, company’s margin, turnover, and return on investment (ROI) for last year

	Beginning Balances	Ending Balances
Cash	133,000	129,000
Accounts receivable	331,000	475,000
Inventory	565,000	485,000
Plant and equipment (net)	891,000	871,000
Total operating assets	19,20,000	19,60,000

Average operating assets = ($19,20,000 + 19,60,000) / 2

= 19,40,000

Company’s Margin       = [ Net operating income / Sales ] x 100

                                       = [ $680,940 / 52,38,000 ] x 100

= 13%

Company’s Turnover    =Sales / Average operating assets

                                       = $52,38,000 / 19,40,000

                                       = 2.70

Company’s ROI           = Margin × Turnover

= 13% x 2.70

= 35.1%

Requirement – 2, Company’s residual income last year

Net operating income	$680,940
Less : Minimum required return        ($19,40,000 x 15%)	291,000
Residual income	$389,940