Multiple Choice
Which of the following is the correct process to enter an adjusting journal entry for prepaid expenses in QuickBooks Online (QBO)?
104
views
3. Accrual Accounting Concepts
Introduction to Adjusting Journal Entries and Prepaid Expenses
Multiple Choice
Which is an advantage of using residual income (RI) over return on investment (ROI)?
A
RI encourages managers to make investments that are profitable for the company, even if they reduce the division's percentage return.
B
RI focuses solely on percentage returns rather than absolute dollar amounts.
C
RI is easier to compare across divisions of different sizes than ROI.
D
RI ignores the cost of capital when evaluating performance.
Verified step by step guidance1
Understand the concept of Residual Income (RI): RI is a measure of performance that calculates the net income generated by a division after deducting the cost of capital. It is expressed in absolute dollar terms rather than percentages.
Understand the concept of Return on Investment (ROI): ROI is a percentage-based measure that evaluates the efficiency of an investment by comparing the net income to the invested capital.
Compare RI and ROI: RI encourages managers to focus on absolute profitability, which can lead to investments that are beneficial for the company overall, even if they reduce the division's percentage return. ROI, on the other hand, focuses on percentage returns, which might discourage managers from pursuing investments with lower percentage returns but higher absolute profits.
Evaluate the advantages of RI: RI is particularly useful for encouraging managers to make decisions that align with the company's overall profitability goals, as it accounts for the cost of capital and focuses on absolute dollar amounts rather than percentages.
Conclude the comparison: The key advantage of RI over ROI is that RI motivates managers to make investments that are profitable for the company, even if they reduce the division's percentage return, as it prioritizes absolute profitability over percentage-based metrics.
Related Videos
Related Practice
