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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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The key difference between residual income and EVA is that EVA

  1. a. uses the actual cost of capital for the company rather than a minimum required cost of capital.
  2. b. uses the minimum required cost of capital for a company rather than the actual percentage cost of capital.
  3. c. is a ratio rather than an absolute dollar amount.
  4. d. cannot be negative.
  5. e. There is no difference between residual income and EVA.

To determine

Identify the statement which represents the key difference between residual income and EVA.

Explanation

Residual Income:

Residual income can be determined by deducting the minimum dollar return on the operating assets of the company from the amount of operating income.

Economic Value Added (EVA):

Economic value added can be evaluated by deducting the dollar amount of capital employed from the operating income after tax. The dollar amount of capital employed can be calculated by multiplying the capital employed by the percentage of the cost of capital.

a.

The residual income is calculated using the operating income (before charging any tax) whereas the economic value added is calculated with the help of after-tax operating income. Another difference is that residual income considers a minimum required cost of capital and EVA considers the actual cost of capital...

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