[flop310]

My test is on Monday and still cant figure out if when finding ROI and Residual income the income used is after or before taxes. I’ve researched and done problems that some were before or after taxes. For example this problem are both before taxes.

REB Service Co. is a computer service center. For the month, REB had the following operating statistics:

Sales $450,000

Operating income 25,000

Net profit after taxes 8,000

Total assets 500,000

Shareholders’ equity 200,000

Cost of capital 6%

Based on the above information, which one of the following statements is true? REB has a

A. Residual income of $(5,000).

B. Return on investment of 4%.

C. Residual income of $(22,000)

D. Return on investment of 1.6%.

Correct answer is A

Can someone please explain?

Thank you!

[barelystayingsane]

I'm also curious about this. Becker implied that ROI is net income and they also said that residual income uses net income (and I've always assumed that net income is after-tax and not operating income or any of that hodge podge). However, I've found in my experience that Becker tends to oversimplify things sometimes…even to the point of being incorrect.

[barelystayingsane]

The 5 sites I've looked at have said that residual income uses operating income (so before taxes and interest), so I'd be inclined to use OI for residual income. Haven't gotten a chance to do ROI yet.

[barelystayingsane]

I was inclined to say ROI used net income after taxes, but you're right…according to this question, that's wrong. Otherwise D would also be correct. Can we just chalk it up to this being a really stupid sample question and not worry about it? 🙂 In reality, your numerators and denominators will vary based on what you're trying to measure. I would hope that the AICPA would understand that and not put a question like this on the actual exam.

[flop310]

Thanks for your response. Yes this is really confusing. So I'll leave as ROI before taxes and Residual income after taxes… Btw I found this question on Gleim. I am guessing their answer was wrong.

[flop310]

Sorry I meant Residual before taxes and ROI after taxes.

[Author]

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