Question

TB Problem Qu. 10-168 Financial data for Beaker...

Financial data for Beaker Company for last year appear below:

Beaker Company
Statements of Financial Position
	Beginning Balance				Ending Balance
Assets:
Cash	$	295,000			$	336,524
Accounts receivable		178,000				180,000
Inventory		275,000				222,000
Plant and equipment (net)		480,000				441,000
Investment in Cedar Company		306,000				322,000
Land (undeveloped)		273,000				273,000
Total assets	$	1,807,000			$	1,774,524
Liabilities and owners' equity:
Accounts payable	$	224,000			$	197,000
Long-term debt		824,000				824,000
Owners' equity		759,000				753,524
Total liabilities and owners' equity	$	1,807,000			$	1,774,524

Beaker Company
Income Statement
Sales				$	2,480,000
Less operating expenses					2,033,600
Net operating income					446,400
Less interest and taxes:
Interest expense	$	99,100
Tax expense		151,776			250,876
Net income				$	195,524

The company paid dividends of $201,000 last year. The "Investment in Cedar Company" on the statement of financial position represents an investment in the stock of another company.

Required:

a. Compute the company's margin, turnover, and return on investment for last year.

b. The Board of Directors of Beaker Company has set a minimum required return of 34%. What was the company's residual income last year?

Answer 1

1 Margin Turnover Return on investment 18.00% 2.06) 37.08% 2 Residual Income $ 37,121 Working Notes: 1 Operating assets = Cash + accounts Receivables +Inventory+Plant and equipment, net Beginning operating assets = $295,000+$178,000+$275,000+$480,000 = $1,228,000 Ending operating assets =$336,524 +$180,000+$222,000+$441,000 = $1,179,524 Average Operating assets = (Beginning operating assets + Ending operating assets)/2 = ($1,228,000+$1,179,524)/2 = $1,203,762 Margin = Net operating Income / Sales = $446,400/$2,480,000 = 18.00% Turnover = Sales / average Operating assets = $2,480,000/$1,203,762 = 2.06 Return on Investment = Margin* turnover = 18.00%*2.06 = 37.08% 2 Residual income = Net Operating Income - (Minimum required rate of return*Average operating assets) = $446,400 - (34%*$1,203,762) = $37,121