Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] Fi

ID: 2528545 • Letter: P

Question

Problem 11-15 Return on Investment (ROI) and Residual Income [LO11-1, LO11-2] Financial data for Joel de Paris, Inc., for last year follow: Joel de Paris, Inc Balance Sheet Beginning Balance Ending Balance Book Assets Cash Accounts receivable Inventory Plant and equipment, net Investment in Buisson, S.A. Land (undeveloped) Total assets Liabilities and Stockholders' Equity Accounts payable Long-term debt Stockholders' equity Total liabilities and stockholders' equity Print $ 131,00 131,000 476,000 487,000 796,000 430,000 251,000 339,000 561,900 819,006 394,000 250,008 érences 2,494,800 2,571,000 $ 377,000 1,006,000 1,111,000 347,000 1,006,00e 1,218,000 2,494,000 $ 2,571,000

Explanation / Answer

Average operating assets

$18,70,000

Margin

13%

Turnover

2.30

ROI

29.9%

Residual income

$2,78,360

WORKINS

1. Compute the company's average operating assets for last year.

Beginning Balances

Ending Balances

Cash

131000

Accounts receivable

339000

476000

Inventory

561000

487000

Plant and equipment (net)

819000

796000

Total operating assets

1850000

1890000

Average operating assets = ($1850000 + $1890000) / 2

= $18,70,000

2. Compute the company’s margin, turnover, and return on investment (ROI) for last year

Margin = Net operating income / Sales

= ($5,59,130 / $43,01,000)*100

= 13%

Turnover =Sales / Average operating assets

= $43,01,000 / $1870000

= 2.30

ROI = Margin × Turnover= 13% x 2.30 = 29.9%

3. What was the company’s residual income last year?

Net operating income $5,59,130

Less : Minimum required return $2,80,500

($1870000 x 15%)

Residual income $2,78,630