Return on investment-residual income, Managerial Accounting

Assignment Help:

Return on Investment and Residual Income

This is a traditional approach to performance measurement given by:

ROI =     Income
         Invested Capital 
             (method) of Liability analysis

ROI can provide more insight to performance when it is divided into the Dupont components. The Dupont method states that:

ROI = Capital turnover X profit margin
      = (Revenue / Invested capital) X (Income / Revenue)

Dupont method leads to the generalization that ROI can be increased by any action that:

•    Decreases costs
•    Increases revenue
•    Decreases invested capital

Return on investment highlights the benefits that managers can obtain by decreasing investment in both current and fixed assets. Investment in cash, inventory, accounts receivable and fixed assets should be minimized for any level of effective performance. This requires that idle cash is invested, proper inventory levels are kept, credit is managed judiciously and fixed assets are invested in carefully.

However, return on investment may induce managers of a highly profitable division to reject projects, which from the view point of the organization as a whole should be accepted. ROI encourages managers to make decisions which may increase short-term profit without considering their effect on the future of the company.


Related Discussions:- Return on investment-residual income

Financial management, using the operating cycle and any financial managemen...

using the operating cycle and any financial management knowledge discuss the applicability of such cycle to poultry business in Uganda (consider broilers)

What are the disadvantages of budgetary control, What are the Disadvantages...

What are the Disadvantages of budgetary control 1) Uncertain future: the budgets are prepared for the future period. Despite best estimates made for the predictions may not

Material control, MATERIAL CONTROL It is said that "any fool can sell"—...

MATERIAL CONTROL It is said that "any fool can sell"—it is buying at the right price that is more critical to the achievement of a satisfactory return on capital employed.  Buy

Budgets, Budgets An essential planning component is budgeting. Budgets ...

Budgets An essential planning component is budgeting. Budgets sketch the financial plans for an organization. There are number of budget types. Operating Budgets -- A plan

Illustrate the important steps of budgetary control, Important steps of bud...

Important steps of budgetary control There are certain steps which are essential for the successful implementation of a budgetary control system. They are as follows: 1) Or

Rules of game theory, RULES OF GAME THEORY 1) The number of competitors...

RULES OF GAME THEORY 1) The number of competitors is finite. 2) There is a conflict of interests between the participants. 3) Each of these participants has available to

#title.advance accounting research on companies., do you make assignments o...

do you make assignments on Advance Accounting subjects

Steps of choosing an accounting based performance, Steps of choosing an acc...

Steps of choosing an accounting based performance measure Consider the overall goal of the organization as a whole. It is important to choose a measure of accomplishment that r

State overhead expenses, State overhead expenses It is to be noted tha...

State overhead expenses It is to be noted that the term overheard has a wider meaning than the term indirect expanses. Overheads include the cost of the indirect material and

Cyclic chains-recurrent state, Cyclic Chains: In Markov Chains the cur...

Cyclic Chains: In Markov Chains the current state of the system depends on all previous states. It is a stochastic process.  Sometimes transition probability matrices are diff

Write Your Message!

Captcha
Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd