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فيديو شرح Residual Income RI vs Return on investment ROI CPA Exam ضمن كورس محاسبة التكاليف شرح قناة Farhat Lectures. The # 1 CPA & Accounting Courses، الفديو رقم 41 مجانى معتمد اونلاين
What is the difference between residual income and return on investment? This CPA Exam BAR lecture compares residual income (RI) and return on investment (ROI) for measuring divisional performance, explaining why ROI can cause managers to reject profitable projects and how RI, using a hurdle rate, better aligns incentives. Ideal for CPA and CMA candidates studying performance measurement, and for accounting students learning divisional evaluation.
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Video Timeline & Key Concepts:
0:00 — Introduction
1:18 — Limitations of ROI and the risk of rejecting profitable projects
3:19 — Calculating residual income
4:25 — The hurdle rate as the minimum required return
5:27 — How residual income overcomes ROI's weaknesses
7:12 — Advantages of residual income
7:41 — Disadvantages of residual income
Frequently Asked Questions:
How is residual income calculated?
Residual income equals a division's operating income minus a capital charge, which is the required rate of return multiplied by the division's invested assets. A positive residual income means the division earned more than its minimum required return.
Why can ROI lead to poor decisions?
ROI is a percentage, so a manager may reject a profitable project simply because it would lower the division's current ROI average. This creates a conflict where a project good for the company is bad for the manager's reported performance.
What is the hurdle rate?
The hurdle rate is the minimum rate of return, often the cost of capital, that the company requires from a division's investments. It serves as the benchmark used in the residual income capital charge.
Why does residual income improve on ROI?
Because residual income rewards any project that earns more than the hurdle rate, managers are encouraged to accept all value-adding projects even if they lower the division's percentage ROI. This better aligns manager incentives with company goals.
What are the drawbacks of residual income?
Residual income is a dollar amount rather than a ratio, so it does not adjust for the relative size of divisions, making comparisons between them harder. In addition, an arbitrarily high hurdle rate can cause the company to pass up worthwhile projects.
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