Which of the following statements most accurately describes residual income?
A)It indicates how efficiently a division uses its average assets to generate sales and thereby profits.
B)It indicates how much operating income the division earns on every dollar of sales.
C)It indicates how much return a division generates on average assets.
D)It indicates how much extra operating income a division generates above the minimum acceptable level.

Question

Quizplus · Accepted Answer

Residual income represents the amount of income that a division earns above the minimum income that the company expects the division to earn. It is the income that remains after deducting the minimum required income from the division's actual income. Therefore, option D is the most accurate statement regarding residual income. Options A, B, and C are related to other financial ratios such as asset turnover, profit margin, and return on assets, respectively.

Which of the Following Statements Most Accurately Describes Residual Income