If an Industry Earns a Return on Capital in Excess

question 15

Multiple Choice

If an industry earns a return on capital in excess of its cost of capital,

• A)incumbents will earn abnormal profit, and build entry barriers.
• B)the government needs to make sure that competition will increase.
• C)it is likely to attract the attention of firms looking to enter the industry, which may eventually lead to the return on capital falling.
• D)it will attract firms outside the industry, but the incumbents will have erected entry barriers.

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Definitions:

Direct Write-off Method

A method of accounting for bad debts where uncollectible accounts are directly written off against income at the time they are deemed non-collectable.

Uncollectible Account

A receivable that a company has not been able to collect from a debtor, leading to its recognition as a bad debt expense on the income statement.

Adjusting Entry

At the conclusion of an accounting cycle, journal entries are documented to distribute earnings and expenditures to the period in which they were genuinely incurred.