Question

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

Joel de Paris, Inc. Balance Sheet
	Beginning Balance			Ending Balance
Assets
Cash	$	133,000		$	139,000
Accounts receivable		333,000			487,000
Inventory		574,000			484,000
Plant and equipment, net		840,000			810,000
Investment in Buisson, S.A.		407,000			428,000
Land (undeveloped)		254,000			254,000
Total assets	$	2,541,000		$	2,602,000
Liabilities and Stockholders' Equity
Accounts payable	$	377,000		$	346,000
Long-term debt		1,041,000			1,041,000
Stockholders' equity		1,123,000			1,215,000
Total liabilities and stockholders' equity	$	2,541,000		$	2,602,000

Joel de Paris, Inc. Income Statement
Sales					$	3,800,000
Operating expenses						3,154,000
Net operating income						646,000
Interest and taxes:
Interest expense	$	111,000
Tax expense		198,000				309,000
Net income					$	337,000

The company paid dividends of $245,000 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

Average operating assets = [(2,541,000-254,000-407,000)+(2,602,000-254,000-428,000)]/2 = 1,900,000
Margin = Net operating income /sales = 646,000/3,800,000 = 17% Turnover = Sales /Average operating assets = 3,800,000/1,900,000 = 2 ROI = Margin*Turnover = 17*2 = 34%
Residual income = Net operating income - required return = 646,000 - (1,900,000*15%) = 361,000