Residual Income Is a Better Evaluation Method Than Return on Investment

question 16

True/False

Residual income is a better evaluation method than return on investment because it has a lower required rate of return for the company projects than return on investment does.

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Definitions:

Profit and Loss Ratio

An indicator that measures the ratio of profits earned to losses incurred over a particular period, often used to assess a company's financial health.

Income Summary

A temporary account in the ledger that summarizes revenue and expenses and transfers the balance (net income or net loss) to Capital. This account does not have a normal balance, i.e. it could have a debit or a credit balance.

Capital Balances

The amounts recorded in the capital accounts of a company or partnership, reflecting the initial capital contributions and subsequent changes including profits earned and withdrawals.

Losses

Financial reductions resulting from business activities, such as the sale of assets for less than their book value or operational losses.