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The income statement for Forklift Electrical Ltd for two years is attached as a pic. Required:   Assuming an 8% cost of capital, calculate the residual income for each year.  Would the management of Forklift Electrical Ltd have been more likely to accept the investment opportunity if the residual income had been used as a performance measure instead of ROI? Explain your answer

The income statement for Forklift Electrical Ltd for two years is attached as a pic. Required:   Assuming an 8% cost of capital, calculate the residual income for each year.  Would the management of Forklift Electrical Ltd have been more likely to accept the investment opportunity if the residual income had been used as a performance measure instead of ROI? Explain your answer

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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The income statement for Forklift Electrical Ltd for two years is attached as a pic.

Required: 

  1.  Assuming an 8% cost of capital, calculate the residual income for each year. 
  2. Would the management of Forklift Electrical Ltd have been more likely to accept the investment opportunity if the residual income had been used as a performance measure instead of ROI? Explain your answer
Forklift Electrical Ltd Income Statement Comparison Current year Prior Year (amounts in thousands) Sales $ 33,750 $ 24,750 Cost of goods sold 21,938 16,830 Gross profit $ 11,812 $ 7,920 Wages $ 8,775 $ 6,188 Utilities 675 250 Repairs 169 325 Selling 506 200 Total expenses $ 10,125 $ 6,963 Total assets (investment base) $ 4,500 $ 1,500
Transcribed Image Text:Forklift Electrical Ltd Income Statement Comparison Current year Prior Year (amounts in thousands) Sales $ 33,750 $ 24,750 Cost of goods sold 21,938 16,830 Gross profit $ 11,812 $ 7,920 Wages $ 8,775 $ 6,188 Utilities 675 250 Repairs 169 325 Selling 506 200 Total expenses $ 10,125 $ 6,963 Total assets (investment base) $ 4,500 $ 1,500
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