A problem with using residual income as a performance measure is that a corporation with a:
A)high investment turnover ratio always has a higher residual income than a corporation with a smaller investment turnover ratio.
B)larger dollar amount of assets is likely to have a higher residual income than a corporation with a smaller dollar amount of assets.
C)high return on sales always has a higher residual income than a corporation with a smaller return on sales.
D)None of these answers are correct.

Question

Quizplus · Accepted Answer

Residual income is calculated by subtracting the cost of capital of a company's assets from its operating profit. Therefore, a company with a larger dollar amount of assets might have a higher residual income simply because it has more assets generating profit, not necessarily because it is more efficient or profitable in relative terms. This can make residual income a less effective measure for comparing performance across companies of different sizes.

A Problem with Using Residual Income as a Performance Measure