Residual Income Is a Better Measure for Performance Evaluation of an Investment

question 52

Multiple Choice

Residual income is a better measure for performance evaluation of an investment center manager than return on investment (ROI) because (CMA adapted)

• A)the problems associated with measuring the asset base are eliminated.
• B)desirable investment decisions will not be neglected by high return divisions.
• C)only the gross book value of assets needs to be calculated.
• D)returns do not increase as assets are depreciated.
• E)the arguments over the cost of capital are eliminated.

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Definitions:

Recoverable Amount

The higher of an asset's fair value less costs to sell and its value in use, reflecting the maximum amount that can be recovered through its use or sale.

Expected Benefit Approaches

A method used in actuarial analysis or in benefits planning, projecting the future benefits to be received, often for purposes of pension plan funding or insurance.

Unverifiable

Pertaining to information or data that cannot be confirmed or corroborated through evidence or additional sources.

Unreliable

Lacking consistency, dependability, or accuracy in information, data, or result.