Residual Income Is a Performance Evaluation That Is Used in Conjunction

question 134

Multiple Choice

Residual income is a performance evaluation that is used in conjunction with, or instead of, return on investment (ROI) . In many cases, residual income is preferred to ROI because: (CIA adapted)

• A) residual income is a measure over time, while ROI represents the results for one period.
• B) residual income concentrates on maximizing absolute dollars of income rather than a percentage return, as with ROI.
• C) the imputed interest rate used in calculating residual income is more easily derived than the target rate that is compared to the calculated ROI.
• D) average investment is employed with residual income while year-end investment is employed with ROI.

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Definitions:

Ending Inventory

The value of goods available for sale at the end of an accounting period, calculated as the sum of beginning inventory plus purchases minus cost of goods sold.