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 $ 128,000
Accounts receivable 348,000 488,000
Inventory 574,000 486,000
Plant and equipment, net 782,000 768,000
Investment in Buisson, S.A. 396,000 430,000
Land (undeveloped) 248,000 248,000
Total assets $ 2,474,000 $ 2,548,000
Liabilities and Stockholders' Equity
Accounts payable $ 390,000 $ 337,000
Long-term debt 969,000 969,000
Stockholders' equity 1,115,000 1,242,000
Total liabilities and stockholders' equity $ 2,474,000 $ 2,548,000
Joel de Paris, Inc.
Income Statement
Sales $ 5,022,000
Operating expenses 4,369,140
Net operating income 652,860
Interest and taxes:
Interest expense 130,000
Tax expense 194,000 324,000
Net income $ 328,860
The company paid dividends of $221,860 last year. The "Investment in Buisson, S.A.," on the balance sheet represents an investment in the stock of another company.
Required:
1. Compute the company’s margin, turnover, and return on investment (ROI) for last year. (Round your answers to 1 decimal place.)
2. The board of directors of Joel de Paris, Inc., has set a minimum required rate of return of 17%. What was the company’s residual income last year?

Answer 1

Joel de Paris, Inc.

1a. Company's margin = Net operating income / Sales x 100 = $652,860 / $5,022,000 x 100 = 13% based on net operating income

Net Margin = net income / sales x 100 = $328,860 / $5,022,000 x 100 = 6.5%

1b. Turnover = $5,022,000

1c. Return on Investment (ROI) = Net Income / Average cost of investment (average assets) = $328,860/$2,511,000 x 100 = 13%

2. Residual income = Net Income minus Minimum Expected Returns

Minimum Expected Returns = 17% of Average Cost of Investment = 17% x $2,511,000 = $426,870.

$328,860 - $426,870 = ($98,010)

Step-by-step explanation:

a) Margin: Margin is the profit or income made in a financial period. It is calculated by deducting costs from the sales revenue. There are two important levels for margin: the gross margin and the net margin. The gross margin represents the profit after deducting direct costs associated with revenue. The net margin is the profit after deducting all business running expenses. It is also called net income.

b) Turnover is the total sales in a financial period, otherwise called the 'gross revenue' or 'gross income.' It is different from profit or margin, and it measures the overall performance of a business.

c) Return on Investment is a financial ratio which measures the efficiency and performance of an investment. It is calculated as net income divided by the average cost of investment multiplied by 100.

d) Average Assets = ($2,474,000 + $2,548,000) / 2 = $2,511,000

e) The Residual Income is Economic Value Added. It is obtained by deducting the cost of capital from the net operating profit after taxes.