A Problem with Using Residual Income Is That a Corporation

question 36

Multiple Choice

A problem with using residual income is that a corporation with a:

• A)high investment turnover ratio always has a higher residual income than a corporation with a smaller investment turnover ratio
• B)high return on sales always has a higher residual income than a corporation with a smaller return on sales
• C)larger dollar amount of assets is likely to have a higher residual income than a corporation with a smaller dollar amount of assets
• D)None of these answers is correct.

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Definitions:

Evaluation

The process of determining the significance, worth, or condition of something, typically through careful appraisal and study.

Depreciation Tax Shield

The tax savings achieved by a company from the allowance for depreciation expenses, reducing taxable income.

Depreciable Basis

The initial cost of an asset that can be depreciated over time for tax purposes, minus any salvage value.

Tax Savings

The reduction in income taxes that results from taking a permissible deduction from taxable income.