Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	128,000		$	135,000
Accounts receivable		341,000			470,000
Inventory		571,000			486,000
Plant and equipment, net		850,000			839,000
Investment in Buisson, S.A.		399,000			430,000
Land (undeveloped)		250,000			252,000
Total assets	$	2,539,000		$	2,612,000
Liabilities and Stockholders' Equity
Accounts payable	$	389,000		$	350,000
Long-term debt		1,041,000			1,041,000
Stockholders' equity		1,109,000			1,221,000
Total liabilities and stockholders' equity	$	2,539,000		$	2,612,000

Joel de Paris, Inc. Income Statement
Sales					$	4,966,000
Operating expenses						4,072,120
Net operating income						893,880
Interest and taxes:
Interest expense	$	119,000
Tax expense		198,000				317,000
Net income					$	576,880

The company paid dividends of $464,880 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. (Do not round intermediate calculations and round your final answers to 2 decimal places.)

3. What was the company’s residual income last year?

Answer 1

Average operating assets = [(2,539,000-250,000-399,000)+(2,612,000-252,000-430,000]/2 = 1,910,000
Margin = Net operating income / sales = 893,880/4,966,000 = 18% Turnover = Sales / Average operating assets = 4,966,000/1,910,000 = 2.6 ROI = margin *turnover = 18*2.6 = 46.80%
Residual income = Net operating income - required return = 893,880 - (1,910,000*15%) = 607,380

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