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Hi.
I don’t understand the statement below:
Residual income is driven by the size of divisions and their investment.
Also, does this make RI at an advantage over ROI
A bigger division will likely have bigger profit, and because it will have bigger investment there will be bigger interest subtracted in arriving at the residual income.
No – it is not really an advantage over ROI because it is not sensible to compare the RI’s of two divisions of different sizes. You would expect the bigger division to have the bigger RI – it doesn’t mean that it is performing better.
Thanks.
What about this statement:
Residual income is directly related to NPV but doesn’t necessarily mean managers will select investments with positive NPvs
Its related to NPV because the notional interest used will usually be the cost of capital.
However, because we are taking profits less interest it will not necessarily give the same result as calculating NPV because NPV’s are calculated on cash flows.
On the ACCA website, it says’ a mission statement has no standard format’
However, don’t mission statements all have something in common, that is brevity, concise, etc.
Doesn’t that mean that mission statements do have a format?
No. Although it is true that they generally have brevity etc., it is not a rule, and there is no standard layout (which is what is meant by format).
Sir
I got a question on Residual Income I dont understand the question and what will be the answer
It says : Residual Income of a division is described as follows :
The rate of return of the division is 10%
The assets of the division is $800000 but controlled by the head office
Other assets of $400000 controlled by the division
What is the imputed rate of interest ?
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