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

question 30

Multiple Choice

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

• 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.

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Definitions:

Credit-Granting Policies

Guidelines established by lenders to determine the criteria and conditions under which credit is extended to borrowers.

Vertical Analysis

An accounting method where each entry in a financial statement is listed as a percentage of another item, typically used for comparing companies of different sizes or assessing trends within a single company over time.

Cost of Goods Sold

The direct expenses related to the manufacturing of products that a company sells.

Current Ratio

A liquidity measure that evaluates a company's ability to pay short-term obligations, calculated as current assets divided by current liabilities.