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) $ 263,000 $ 31,164 215,000 266,000 473,000 293,000 497,000 126,000 255,000 466,000 221,000 497,000 Total assets $1,828,000 $1,775,164 Liabilities and owners' equity: Accounts payable Long-term debt Owners' equity $ 164,000 $ 228,000 884,000 663,164 884,000 780,000 Total liabilities and owners' equity $1,828,000 $1,775,164 Redstone Company Income statement Sales Less operating expenses $2,040,000 1,795,200 244,800 Net operating income Less interest and taxes Interest expense Tax expense $100,300 78,336 178,636 Net income $66,164

Explanation / Answer

Margin = Operating Income*100/Revenue

= 244,800*100/2,040,000 = 12%

Turnover = 2,040,000

Return on Investment = Operating Income/Total Assets = 12%*1.32 = 15.84%

Working Note - Capital Turnover Ratio = Revenue*100/Total Assets = 2,040,000*100/(1,775,164-228,000) = 1.32

2. Last year Capital Employed = 1828,000-164,000 = 1,664,000

ROI = 1,664,000*20% = 332,800

Residual Income = 332,800 - 180,000 = 152,800

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