A Primary Limitation of Return on Investment (ROI) as a Performance

question 142

Multiple Choice

A primary limitation of return on investment (ROI) as a performance evaluation metric for investment centers is that ROI:

• A) Is a long-term, not short-term, performance indicator.
• B) Understates the level of investment for organizations operating in the so-called knowledge-based economy.
• C) Excludes the level of investment from the performance metric.
• D) Cannot handle current-value estimates of assets.
• E) Is not a relative performance indicator.

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Definitions:

Direct Method

A financial accounting method that allocates service department costs directly to production departments without considering services rendered between service departments.

Net Income

The final earnings of a corporation, calculated by subtracting all operating costs and tax liabilities from its total sales revenue.

Accounts Receivable

Balances owed to a company by its customers for goods or services provided on credit.

Direct Method

A costing method primarily used in cost accounting that allocates service department costs directly to production departments without any intermediate allocations.