Problem 12-5 Computing ROl and RI (LO2 - CC4, 6) Financial data for Joel de Pari

Question

Problem 12-5 Computing ROl and RI (LO2 - CC4, 6) Financial data for Joel de Paris Inc. for last year follow: JOEL DE PARIS INC Balance Sheet Ending Balance Beginning Balance Assets Cash Accounts receivable Inventory Plant and equipment, net Investment in Buisson, S.A Land (undeveloped) $450,000 1,350,000 675,000 1,575,000 900,000 1,350,000 448,000 324,000 900,000 1,800,000 487,000 296,000 Total assets $5,283,000 $5,272,000 Liabilities and Shareholders' Equity Accounts payable Long-term debt Shareholders' equity $860,000 $ 971,000 3,884,000 417,000 3,440,000 983,000 Total liabilities and shareholders' equity $5,283,000 $5,272,000 JOEL DE PARIS INC Income Statement Sales Less: Operating expenses $8,100,000 6,480,000 1,620,000 Net operating income Less: Interest and taxes Interest expense Tax expense $595,000 435,000 1,030,000 Net income $ 590,000

Explanation / Answer

Req 1: Margin ratio = Net Income / Net sales *100 Net Income: $590,000 Net sales: $ 8100,000 Margin ratio = 590,000 /8100,000 *100 = 7.284% Turnover: Net sales / Average operating assets Average Operating assets: Beginning Operating assets (5272,000-971,000-448000-324000)= 3529000 Ending Operating Assets (5283,000-860,000-487000-296000)= 3640000 Average Operating assets: 3584500 Turnover: 8100,000 /3584,500 = 2.26 ROI: Margin ratio*Assets turnover = 7.284*2.26 = 16.46% Req 2: Residual income: Net income earned: 590,000 Lless: Target return (3584500*29%) 1039505 Residual income: -449,505

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