Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	137,000		$	140,000
Accounts receivable		337,000			480,000
Inventory		561,000			474,000
Plant and equipment, net		795,000			776,000
Investment in Buisson, S.A.		403,000			431,000
Land (undeveloped)		245,000			253,000
Total assets	$	2,478,000		$	2,554,000
Liabilities and Stockholders' Equity
Accounts payable	$	383,000		$	346,000
Long-term debt		970,000			970,000
Stockholders' equity		1,125,000			1,238,000
Total liabilities and stockholders' equity	$	2,478,000		$	2,554,000

Joel de Paris, Inc. Income Statement
Sales					$	4,625,000
Operating expenses						3,931,250
Net operating income						693,750
Interest and taxes:
Interest expense	$	114,000
Tax expense		193,000				307,000
Net income					$	386,750

The company paid dividends of $273,750 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

1.
Calculation of average operating assets for last year.
Average operating assets = (Beginning operating assets + Ending operating assets)/2
	Beginning balance	Ending balance
Cash	$137,000	$140,000
Accounts receivable	$337,000	$480,000
Inventory	$561,000	$474,000
Plant and equipment, net	$795,000	$776,000
Total operating assets	$1,830,000	$1,870,000
Average operating assets	(1,830,000+1,870,000)/2
Average operating assets	$1,850,000
Thus, company's average operating assets for last year is $1,850,000
2.
Operating margin is the percentage of operating income earned by company on sales made.
Calculation of company's margin for last year.
Company's margin	Net operating income/Sales revenue
Company's margin	$693,750/$4,625,000
Company's margin	15.00%
Thus, company's margin for last year is 15%.
Operating turnover indicates efficiency with which operating assets are used to generate sales revenue.
Calculation of company’s turnover for last year.
Turnover	Sales revenue/Average operating assets
Turnover	$4,625,000/$1,850,000
Turnover	2.50
Thus, company's turnover for last year is 2.50.
Return on investment is percentage of operating income earned on investment made in operating assets.
Calculation of return on investment for last year.
Return on investment	Profit margin*Operating asset turnover
Return on investment	15%*2.50
Return on investment	37.50%
Thus, return on investment for last year is 37.50%
3.
Residual income is excess income earned by company over its expected operating income
Calculation of residual income for last year
Residual income	Actual income - Expected income
Actual operating income	$693,750
Expected income	$277,500	(1,850,000*15%)
Residual income	$416,250
Thus, residual income for last year is $416,250.