Question

Beaker Company Statements of Financial Position Beginning Balance Ending Balance Assets: Cash 263,000 $ 31,164 Accounts receivable 126,000 255,000 215,000 266,000 Inventory Plant and equipment (net) 466,000 473,000 Investment in Cedar Company 221,000 293,000 497,000 Land (undeveloped) 497,000 Total assets $ 1,828,000 $ 1,775,164 Liabilities and owners' equity: Accounts payable $ 164,000 $ 228,000 Long-term debt 884,000 884,000 780,000 663,164 Owners' equity Total liabilities and owners' equity $ 1,828,000 $ 1.775,164 Beaker Company Income Statement Sales $ 2,040,000 Less operating expenses 1,795,200 Net operating income 244,800 Less interest and taxes: Interest expense $ 100,300

Answer 1

Beginning Operating Assets = Cash + Accounts Receivable + Inventory + Plant and Equipment (net)
Beginning Operating Assets = $263,000 + $126,000 + $255,000 + $466,000
Beginning Operating Assets = $1,110,000

Ending Operating Assets = Cash + Accounts Receivable + Inventory + Plant and Equipment (net)
Ending Operating Assets = $31,164 + $215,000 + $266,000 + $473,000
Ending Operating Assets = $985,164

Average Operating Assets = (Beginning Operating Assets + Ending Operating Assets) / 2
Average Operating Assets = ($1,110,000 + $985,164) / 2
Average Operating Assets = $1,047,582

Operating Income = $244,800

Sales = $2,040,000

Margin = Operating Income / Sales
Margin = $244,800 / $2,040,000
Margin = 12%

Turnover = Sales / Average Operating Assets
Turnover = $2,040,000 / $1,047,582
Turnover = 1.95

Return on Investment = Margin * Turnover
Return on Investment = 12% * 1.95
Return on Investment = 23.40%

Residual Income = Operating Income - Minimum Required Return * Average Operating Assets
Residual Income = $244,800 - 0.20 * $1,047,582
Residual Income = $35,284