Managerial Accounting, Loose-leaf Version
Managerial Accounting, Loose-leaf Version
14th Edition
ISBN: 9781337270717
Author: WARREN, Carl S.; Reeve, James M.; Duchac, Jonathan
Publisher: South-Western College Pub
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Chapter 9, Problem 5PB

(1)

To determine

Income statement: The financial statement which reports revenues and expenses from business operations and the result of those operations as net income or net loss for a particular time period is referred to as income statement.

Profit margin: This ratio gauges the operating profitability by quantifying the amount of income earned from business operations from the sales generated.

Formula of profit margin:

Profit margin=Income from operationsSales

Investment turnover: This ratio gauges the operating efficiency by quantifying the amount of sales generated from the assets invested.

Formula of investment turnover:

Investment turnover=SalesInvested assets

Return on investment (ROI): This financial ratio evaluates how efficiently the assets are used in earning income from operations. So, ROI is a tool used to measure and compare the performance of a units or divisions or a companies.

Formula of ROI according to Dupont formula:

Return on investment = Profit margin × Investment turnover=Income from operationsSales×SalesInvested assets=Income from operationsInvested assets

Residual income: The remaining income from operations after deducting the desired acceptable income is referred to as residual income.

Formula of residual income:

Income from operations XXX
Less minimum acceptable income from operations as a percent of invested assets XXX
Residual income XXX

Table (1)

To prepare: The income statements for RB and MB Divisions of Company FRB for the year ended December 31, 20Y7

(2)

To determine

Profit margin, investment turnover, and return on investment of RB and MB Divisions

(3)

To determine

Residual income of for RB and MB Divisions

(4)

To determine

The profitable division by using the performance measures of income from operations, ROI, and residual income

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Managerial Accounting, Loose-leaf Version

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Financial ratio analysis; Author: The Finance Storyteller;https://www.youtube.com/watch?v=MTq7HuvoGck;License: Standard Youtube License