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Lecture 1

ACCT-311 Lecture Notes - Lecture 1: Earnings Before Interest And Taxes


Department
Accounting
Course Code
ACCT-311
Professor
A N O N Y M O U S
Lecture
1

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Cost, Revenue, Profit, and Investment Centres
Decentralization and Segment Reporting
Return on Investment (ROI) Formula
Return on Investment (ROI) Example
Monthaven Burger Grill has the following information:
Net operating income $ 10,000
Average operating assets $ 50,000
Sales $ 100,000
Return on Investment (ROI) Formula
Elements of Return on Investment
Controlling the Rate of Return
Three ways to improve ROI . . .
Criticisms of ROI - Example
As division manager, your compensation package includes a
salary plus bonus based on your division’s ROI -- the higher
your ROI, the bigger your bonus.
The company requires an ROI of 15% on all new investments --
your division has been producing an ROI of 30%.
You have an opportunity to invest in a new project that will
produce an ROI of 25%. As division manager would you
invest in this project?
Residual Income (RI)
Another measure of an investment centre’s performance is
residual income.
Residual Income is the net operating income that an investment
centre earns above the minimum required return on its
operating assets.
Residual Income
A division of Zepher, Inc. has average operating assets of
$100,000 and is required to earn a return of 20% on these
assets.
In the current period the division earns $30,000.
Residual Income
Divisional Comparison and Residual Income
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