Residual Income Is a Better Measure for Performance Evaluation of an Investment

question 67

Multiple Choice

Residual income is a better measure for performance evaluation of an investment center manager than return on investment because: (CMA adapted)

• A) the problems associated with measuring the asset base are eliminated.
• B) desirable investment decisions will not be rejected by divisions that already have a high ROI.
• C) only the gross book value of assets needs to be calculated.
• D) returns do not increase as assets are depreciateD.
• Residual income indicates those situations with more than a threshold return that should be accepteD.

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Definitions:

Capital Balance

The amount of money in a company's equity account, not including profits or losses.

Interest

The fee paid for borrowing money, typically expressed as an annual percentage of the principal.

Relinquished

Refers to the act of giving up or surrendering a right, possession, or claim.

Capital Account Balance

The amount recorded in a company's equity section of the balance sheet that represents the total capital from owners or shareholders.