Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	129,000		$	136,000
Accounts receivable		342,000			473,000
Inventory		577,000			486,000
Plant and equipment, net		832,000			825,000
Investment in Buisson, S.A.		390,000			433,000
Land (undeveloped)		253,000			252,000
Total assets	$	2,523,000		$	2,605,000
Liabilities and Stockholders' Equity
Accounts payable	$	388,000		$	347,000
Long-term debt		1,038,000			1,038,000
Stockholders' equity		1,097,000			1,220,000
Total liabilities and stockholders' equity	$	2,523,000		$	2,605,000

Joel de Paris, Inc. Income Statement
Sales					$	4,750,000
Operating expenses						4,085,000
Net operating income						665,000
Interest and taxes:
Interest expense	$	114,000
Tax expense		195,000				309,000
Net income					$	356,000

The company paid dividends of $233,000 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

Ans.	Assets	Beginning balance	Ending balance
	Cash	$129,000	$136,000
	Accounts receivables	$342,000	$473,000
	Inventory	$577,000	$486,000
	Plant and equipment	$832,000	$825,000
	Total operating assets	$1,880,000	$1,920,000
	*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
		($1,880,000 + $1,920,000) / 2
		$3,800,000 / 2
		$1,900,000
Ans.2 a	Margin =   Net operating income / Sales * 100
	$665,000 / $4,750,000 * 100
	14.00%
Ans.2 b	Turnover = Sales / Average operating assets
	$4,750,000 / $1,900,000
	2.50	times
Ans. 2 c	Return on investment (ROI) =   Turnover * Margin
	2.50 * 14%
	0.35 or 35%
Ans. 3	Residual income =   Operating income - Minimum required income
	$665,000 - $285,000
	$380,000
	*Minimum required income   =   Average operating assets * Desired rate of return
	$1,900,000 * 15%
	$285,000
	*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.