A Company May Prefer to Use Residual Income Over Return

question 228

Multiple Choice

A company may prefer to use residual income over return on investment for performance evaluation because ________.

• A) residual income is a ratio but return on investment is an absolute figure
• B) residual income is more likely to lead to goal congruence than return on investment
• C) residual income is easier to calculate than return on investment
• D) residual income considers three elements but return on investment considers only two elements

Understand the reasons behind banks requiring companies to maintain compensating balances and their impact on business operations.

Understand the importance of properly reporting inventory in financial statements.

Comprehend the differences and applications of FIFO, LIFO, and average inventory costing methods.

Recognize the role of purchase orders in inventory control.

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Definitions:

Annual Rate of Return

The yearly profit from an investment, expressed as a percentage of the original investment.

Quantitative Techniques

Mathematical or statistical methods applied for analyzing numerical data, often used in decision-making processes.

Cash Payback Technique

Identifies the time period required to recover the cost of a capital investment from the net annual cash flow produced by the investment.

Discounted Cash Flow

A valuation method used to estimate the value of an investment based on its expected future cash flows, adjusted for time value of money.