Question

Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash $ 126,000 $ 137,000 Accounts receivable 332,000 474,000 Inventory 561,000 490,000 Plant and equipment, net 861,000 819,000 Investment in Buisson, S.A. 395,000 432,000 Land (undeveloped) 251,000 245,000 Total assets $ 2,526,000 $ 2,597,000 Liabilities and Stockholders' Equity Accounts payable $ 390,000 $ 335,000 Long-term debt 969,000 969,000 Stockholders' equity 1,167,000 1,293,000 Total liabilities and stockholders' equity $ 2,526,000 $ 2,597,000 Joel de Paris, Inc. Income Statement Sales $ 4,560,000 Operating expenses 3,967,200 Net operating income 592,800 Interest and taxes: Interest expense $ 113,000 Tax expense 197,000 310,000 Net income $ 282,800 The company paid dividends of $156,800 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

Answer- 1)-The company average operating assets for last year was =$1900000.

Explanation- Calculation of average operating assets = (Opening operating assets+ Closing operating assets)/2

=($126000+$332000+$561000+$861000)+($137000+$474000+$490000+$819000)/2

=($1880000+$1920000)/2

=$1900000

Operating assets = Cash+ Accounts receivable+ Inventory+ Plant & equipment, net

2)- Margin – (Net operating income /Sales)*100

= ($592800/$4560000)*100

= 13%

Turnover = Sales/ Average operating assets

= $4560000/$1900000

=2.4

Return on investment = Margin*Turnover

= 13%*2.4

= 31.2%

3)- Residual income for the last year = $307800.

Explanation- Residual income =Operating income –(Average operating assets*Required rate of return)

= $592800-($1900000*15%)

= $592800-$285000

= $307800