Chapter 23 Performance Measurement questions with answers.

Chapter 23 Performance Measurement
questions with answers.
Available Financial Measures ANS -1. ROI, including the DuPont Formulation

2. Residual Income (RI)

3. Return on Equity



ROI represents ANS -an accounting measure of income divided by an accounting measure of investment
or assets



ROI is the most popular metric for two reasons: ANS -1. Blends all the ingredients of profitability
(revenues, costs, and investment) into a single percentage

2. May be compared to other ROIs both inside and outside the firm



ROI = ANS -(revenue - expenses) / total assets



The DuPont Method of Profitability Analysis decomposes ROI into its two components as follows: ANS -
Income / Investment = (Income / Revenue) * (Revenues / Investment)



Improving the ROI ANS -look at charts



ROI Advantages ANS --Easily understood

-Comparable to interest rates and rates of return on alternative investments

-Widely used



ROI Limitations ANS -Disincentive for high ROI units to invest in projects with ROI greater than the
minimum rate of return but less than the unit's current ROI.



Residual Income (RI) represents ANS -an accounting measure of income minus a dollar amount for
required return on an accounting measure of investment