1. Calculate residual income, assuming Doorchime defines investment as total assets. 2. Calculate EVA for the year. Adjust both the year-end assets and operating income for advertising assuming that for the purposes of economic value added the advertising is capitalized and amortized on a straight- line basis over 4 years. 3. Discuss the difference between the outcomes of requirements 1 and 2. Which measure would you recommend, and why? Required
1. Calculate residual income, assuming Doorchime defines investment as total assets. 2. Calculate EVA for the year. Adjust both the year-end assets and operating income for advertising assuming that for the purposes of economic value added the advertising is capitalized and amortized on a straight- line basis over 4 years. 3. Discuss the difference between the outcomes of requirements 1 and 2. Which measure would you recommend, and why? Required
Cornerstones of Financial Accounting
4th Edition
ISBN:9781337690881
Author:Jay Rich, Jeff Jones
Publisher:Jay Rich, Jeff Jones
Chapter12: Fainancial Statement Analysis
Section: Chapter Questions
Problem 90PSB
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Residual income and EVA; timing issues. Doorchime Company makes doorbells. It has a weighted-average cost of capital of 6% and total assets of $5,690,000. Doorchime has current liabilities of $550,000. Its operating income for the year was $630,000. Doorchime does not have to pay any income taxes. One of the expenses for accounting purposes was a
$70,000 advertising campaign run in early January. The entire amount was deducted this year, although the Doorchime CEO believes the benecial effects of this advertising will last 4 years.
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