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Financial data for Joel de Paris, Inc
Financial data for Joel de Paris, Inc., for last year follow:
| Joel de Paris, Inc. Balance Sheet |
||||||
| Beginning Balance |
Ending Balance |
|||||
| Assets | ||||||
| Cash | $ | 140,000 | $ | 120,000 | ||
| Accounts receivable | 450,000 | 530,000 | ||||
| Inventory | 320,000 | 380,000 | ||||
| Plant and equipment, net | 680,000 | 620,000 | ||||
| Investment in Buisson, S.A. | 250,000 | 280,000 | ||||
| Land (undeveloped) | 180,000 | 170,000 | ||||
| Total assets | $ | 2,020,000 | $ | 2,100,000 | ||
| Liabilities and Stockholders' Equity | ||||||
| Accounts payable | $ | 360,000 | $ | 310,000 | ||
| Long-term debt | 1,500,000 | 1,500,000 | ||||
| Stockholders' equity | 160,000 | 290,000 | ||||
| Total liabilities and stockholders' equity | $ | 2,020,000 | $ | 2,100,000 | ||
| Joel de Paris, Inc. Income Statement |
|||||||||
| Sales | $ | 4,050,000 | |||||||
| Operating expenses | 3,645,000 | ||||||||
| Net operating income | 405,000 | ||||||||
| Interest and taxes: | |||||||||
| Interest expense | $ | 150,000 | |||||||
| Tax expense | 110,000 | 260,000 | |||||||
| Net income | $ | 145,000 | |||||||
The company paid dividends of $15,000 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 "Turnover" to 1 decimal place.)
3. What was the company’s residual income last year?
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Expert Solution
1.
| Beginning balance | Ending balance | |
| Cash | $140,000 | $120,000 |
| Accounts receivables | $450,000 | $530,000 |
| Inventory | $320,000 | $380,000 |
| Plant and equipment, net | $680,000 | $620,000 |
| Total operating assets | $1,590,000 | $1,650,000 |
In the given question, Investment in Buisson, S.A. and Land ( Undeveloped ) are not an operating asset, because they do not contribute anything in the main operating activities of the company.
Average operating assets = [ Beginning total operating assets + Ending total operating assets ] / 2 = [ $1,590,000 + $1,650,000 ] / 2 = $1,620,000
2. Margin = Net operating income / Sales = $405,000 / $4,050,000 = 10%
Turnover = Sales / Average operating assets = $4,050,000 / $1,620,000 = 2.5
Return on investment ( ROI ) = Net operating income / Average operating assets = $405,000 / $1,620,000 = 25%
3. Residual income = Net operating income - ( Average operating assets * Minimum required rate of return ) = $405,000 - ( $1,620,000 * 15% ) = $162,000
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