Financial data for Redstone Company for last year appear below: Redstone Company

Question

Financial data for Redstone Company for last year appear below: Redstone Company Statements of Financial Position Beginning Balance Ending Balance Assets Cash Accounts receivable Inventory Plant and equipment (net) Investment in Balsam Company Land (undeveloped) $ 341,000 $ 336,590 192,000 251,000 385,000 257,000 301,000 188,000 260,000 448,000 315,000 301,000 Total assets $1,853,000 $1,722,590 Liabilities and owners' equity: Accounts payable Long-term debt Owners' equity $ 203,000 892,000 758,000 206,000 892,000 624,590 Total liabilities and owners' equity $1,853,000 $1,722,590 Redstone Company Income statement Sales Less operating expenses $2,350,000 2,103,250 246,750 Net operating income Less interest and taxes Interest expense $99,200 78,960 Tax expense 178,160 Net income $ 68,590 The company paid dividends of $202,000 last year. The "Investment in Balsam Company" on the statement of financial position represents an investment in the stock of another company

Explanation / Answer

Beginning operating assets =1853000-315000-301000= 1237000 Ending operating assets =1722590-257000-301000= 1164590 Average operating assets =(1237000+1164590)/2= 1200795 a margin = net operating income/Sales=246750/2350000= 10.50% Turnover = Sales/Average operating assets=2350000/1200795= 1.96 Return on investment=margin*Turnover = 10.5%*1.96= 20.58% b Residual income=246750-(1200795*18%)= 30606.90

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