Which of the following is used in the calculation of both return on investment and residual income?
A) Total shareholders' equity
B) Retained earnings
C) Invested capital
D) Cost of capital

Question

Quizplus · Accepted Answer

Invested capital is used in both the calculation of return on investment and residual income. Return on investment is calculated by dividing the net income by the invested capital, while residual income is calculated by subtracting the cost of capital from net operating income multiplied by the invested capital. Total shareholders' equity and retained earnings are not used in these calculations, while the cost of capital is only used in the calculation of residual income.

Which of the Following Is Used in the Calculation of Both