Multiple Choice
Which of the following is the primary goal of making adjusting journal entries for prepaid expenses at the end of an accounting period?
86
views
3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
Multiple Choice
Which of the following statements correctly contrasts residual income (RI) with return on investment (ROI)?
A
Residual income considers a required minimum return on investment, while ROI does not.
B
Both residual income and ROI always lead to the same investment decisions.
C
Residual income ignores the cost of capital, but ROI incorporates it.
D
ROI measures absolute dollar value, whereas residual income is expressed as a percentage.
Verified step by step guidance1
Understand the concepts of Residual Income (RI) and Return on Investment (ROI): RI measures the absolute dollar amount of profit above a required minimum return, while ROI measures the percentage return on an investment relative to its cost.
Analyze the statement 'Residual income considers a required minimum return on investment, while ROI does not': This is correct because RI explicitly accounts for a minimum required return, whereas ROI focuses on the percentage return without considering a threshold.
Evaluate the statement 'Both residual income and ROI always lead to the same investment decisions': This is incorrect because RI and ROI can lead to different decisions depending on the required minimum return and the scale of the investment.
Assess the statement 'Residual income ignores the cost of capital, but ROI incorporates it': This is incorrect because RI explicitly incorporates the cost of capital (minimum required return), while ROI does not directly account for it.
Review the statement 'ROI measures absolute dollar value, whereas residual income is expressed as a percentage': This is incorrect because ROI is expressed as a percentage, while RI measures absolute dollar value.
Related Videos
Related Practice
