Consider the following statements about residual income:
I. Residual income incorporates a firm's cost of acquiring investment capital.
II. Residual income is a percentage measure, not a dollar measure.
III. If used correctly, residual income may result in division managers making decisions that are in their own best interest and not in the best interest of the entire firm.
Which of the above statements is (are) true?
A) I only.
B) II only.
C) I and II.
D) II and III.
E) I and III.

Question

Quizplus · Accepted Answer

Residual income incorporates a firm's cost of acquiring investment capital, making statement I true. Statement II is false because residual income is a dollar measure, not a percentage measure. Statement III is false because residual income aligns division managers' decisions with the firm's best interest by considering the cost of capital.

Consider the Following Statements About Residual Income