Windsor, Inc Statements of Financial Position Beginning Balance Ending Balance A

Question

Windsor, Inc Statements of Financial Position Beginning Balance Ending Balance Assets Cash Accounts receivable Inventory Plant and equip Investment in Pine Company Land (undeveloped) Total assets S 250,000 120,000 230,000 420,000 220,000 S 260,000 135,000 205,000 380,000 250,000 ment (net) Liabilities and owners' equity: Accounts payable Long-term debt. Owners' equity Total liabilities and owners equity 160,000 S 140,000 800,000 800,000 .... Windsor, Inc Income Statement Sales $1,750,000 I 470,000 280,000 Less operating expenses Net operating income Less interest and taxes Interest expense Tax expense Net income ...S96,000 70,000 166 The company paid dividends of $104,000 last year. The "Investment in Pine Company" on the statement of financial position represents an investment in the stock of another company. Required a. Compute the company's margin, turnover, and return on investment for last year. b. The Board of Directors of Windsor, Inc. has set a minimum required return of 25%. what was the company's residual income last year?

Explanation / Answer

Solution:-

a. Compute the company's margin, turnover, and return on investment for last year:-

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

Average operating assets = ($1,020,000 + $980,000)/2 = $1,000,000

Margin = Net Operating Income/Sales = $280,000 / $1,750,000 = 16%

Turnover = Sales / Average Operating Assets = $1,750,000 / $1,000,000 = 1.75

ROI = Margin x Turnover = 16% x 1.75 = 28%

b. The Board of Directors of Windsor, Inc., has set a minimum required return of 25%. What was the company's residual income last year:-

Please Rate or comment if you have any doubt regarding this solution.

Beginning balance Ending balance Cash 250,000 260,000 Accounts Receivable 120,000 135,000 Inventory 230,000 205,000 Plant and Equipment (Net) 420,000 380,000 Total Operating Assets 1,020,000 980,000

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