The Major Advantage of Residual Income as a Performance Measure

question 199

True/False

The major advantage of residual income as a performance measure is that it gives consideration to not only a minimum return on investment but also to the total magnitude of operating income earned by each division.

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Definitions:

Capital Spending

Expenditures by a company for physical assets such as property, industrial buildings, or equipment, intended to improve its long-term capacity or efficiency.

Salvage Value

An asset's expected market price at the conclusion of its effective life.

Incremental Cash Flow

Consists of the additional operating cash flow an organization receives from taking on a new project.

Net Working Capital

The gap between what a business owns as current assets and what it owes in current liabilities, revealing the liquid funds available for operational purposes.