Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash A

Question

Joel de Paris, Inc. Balance Sheet Beginning Balance Ending Balance Assets Cash Accounts receivable Inventory Plant and equipment, net Investment in Buisson, S.A. Land (undeveloped) $ 135,000 $ 139,000 339,000 482,000 481,000 818,000 409,000 434,000 251,000 251,000 569,000 837,000 Total assets $2,540,000 $2,605,000 Liabilities and Stockholders' Equity Accounts payable Long-term debt Stockholders' equity $ 371,000 $ 339,000 1,038,000 1,038,000 1,131,000 1,228,000 Total liabilities and stockholders' equity $2,540,000 $2,605,000 Joel de Paris, Inc. Income Statement Sales Operating expenses $ 4,370,000 3,714,500 655,500 Net operating income Interest and taxes $ 127,000 Interest expense Tax expense 210,000 337,000 Net income $ 318,500

Explanation / Answer

Solution:

1) Calculation of Margin, Turnover and Return on investment:

Operating assets do not include investments in other companies or in undeveloped land.

Average operating assets = (1,920,000 + 1,880,000)/ 2 = 1,900,000

Margin = Net Operating Income/ Sales

= 655,500/ 4,370,000

= 15%

Turnover = Sales/ Average operating assets

= 4,370,000/ 1,900,000

= 2.3

ROI = Margin * Turnover

= 15% * 2.3

= 34.50%

2) Calculation of Residual Income:

Ending Balances Beginning Balances Cash                  139,000                         135,000 Accounts Receivable                  482,000                         339,000 Inventory                  481,000                         569,000 Plant and equipment (net)                  818,000                         837,000 Total operating assets               1,920,000                      1,880,000

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