Which of the Following Formulas Computes Residual Income

question 27

Multiple Choice

Which of the following formulas computes residual income?

• A) Residual Income = Operating Income − Return on Investment
• B) Residual Income = Operating Income / Average Operating Assets
• C) Residual Income = After-tax Operating Income / (Actual Percentage Cost of Capital × Total Capital Employed)
• D) Residual Income = Operating Income − (Minimum Rate of Return × Average Operating Assets)
• E) Residual Income = (Minimum Rate of Return × Average Operating Assets) / Operating Income

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Definitions:

Retained Earnings

The portion of net income that is not distributed to shareholders as dividends but is kept by the company for reinvestment.

Fiscal Year

A fiscal year is a 12-month period used for accounting purposes, often not aligning with the calendar year, to report financial performance.

Ledger

A comprehensive collection of a company's financial accounts, where all transaction data is recorded, including debits and credits.

Adjusting Entries

Journal entries made at the end of an accounting period to record revenues to the period they are earned and expenses to the period incurred.