Chapter 24, Problem 14CP

To determine

Concept Introduction:

Assets: These are resources which the company owns and will generate future economic benefits. The assets are categorized into fixed asset which will help in generating revenues for long period of time and examples is plant and machinery, building , equipments etc and current assets are resources which will be converted into cash within one year examples are accounts receivable , inventory

Return on Investment: It shows the profitability and efficiency of assets in generating revenues. The formula of calculating Return of Investment is given below

$\begin{array}{l}\text{Return on Investment = }\frac{\text{Operating Income}}{\text{Average total assets}}\text{ x 100}\\ \text{Where}\\ \text{Average total Assets = }\frac{\text{opening balance of assets + closing balance of assets}}{2}\end{array}$

It always shown in percentage

Minimum acceptable operating income: The Company provides a target rate of return on average total assets to be accomplished. This will be converted into minimum acceptable operating income. The formula is as below

$\begin{array}{l}\text{Minimum acceptable operating income = target rate of return x average total assets}\\ \text{Where}\\ \text{Average total Assets = }\frac{\text{opening balance of assets + closing balance of assets}}{2}\end{array}$

Residual income: The operating income which is over and above the minimum acceptable operating income is termed as residual income. The formula to calculate is given below

$\text{Residual Income = operating income - minimum acceptable operating income}$

To Prepare:

Calculate Residual income for Thompson Toy Company