Residual income is determined as
A)income times the asset turnover rate.
B)income times the inventory turnover rate.
C)income minus (asset base times target rate of return).
D)sales minus (asset base times target rate of return).

Question

Quizplus · Accepted Answer

Residual income is calculated as the income earned by a company after deducting the cost of capital. The cost of capital is the opportunity cost of funds invested in the business. Choice C represents the formula for calculating residual income as income minus (asset base times target rate of return). The asset base is the amount of capital invested in the business, and the target rate of return is the minimum required return on the capital invested by the investors. The residual income is the excess income earned by the company after meeting the minimum required return on capital.

Residual Income Is Determined as