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Managerial Accounting

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Basics of Residual Income: Why This Approach?

MGRACT-RKBA3S

Which of the following statements is/are true about why we use the residual income approach?

Select ALL that apply.

A

Residual income is used because ROI ignores the minimum rate of return on a company's operating assets.

B

Residual income is used because it ignores the possibility that one investment in the organization may use substantially fewer assets to attain the same level of residual income as another investment.

C

Residual income is used as a way to decide to approve or reject a capital investment as it measures net income above the threshold of the minimum rate of return.

D

Residual income is used because it accepts any investment proposal that exceeds the minimum required return on the investment, but rejects any project with a projected return of less than the average rate of return of the profit center.