Consider the following information for Executive Electronics: 12/31/2014 12/31/2015 Total
assets $12,000,000 $11,900,000 Noninterest-bearing current liabilities 571,000 551,000 Net
income 777,000 858,000 Interest expense 2,320,000 320,000 Tax rate 40% 40% Required rate of
return 10% 12% Evaluate the company in terms of residual income (RI), which is equivalent to
EVA since there are no adjustments for accounting distortions. (Enter negative answers
preceeding either - sign, e.g. -45 or in parentheses, e.g. (45).) 2014 2015 Residual income $ $
While income has increased in fiscal 2015, is it clear that the company’s performance has
improved?
Solution
Formulae of Residual Income (RI) = A (B × C)
In formula,
A = Department\'s net operating income;
B = Minimum required return on assets; and
C = Average operating assets of the department
Residual Income in 2014 =
First of all calculate operating income = (7,77,000 x 100 /60) + 2,32,000
= 12,95,000 + 2,32,000 = 15,27,000.
Operating Assets = 12,000,000 – 5,71,000 = 11,429,000
Residual Income = 15,27,000 – (11,429,000 x 10 / 100)
= 15,27,000 – 11,42,900 = 3,84,100.
Residual Income in 2015 =
First of all calculate operating income = (8,58,000 x 100 /60) + 3,20,000
= 14,30,000 + 3,20,000 = 17,50,000.
Operating Assets = 11,900,000 – 5,51,000 = 11,349,000
Residual Income = 17,50,000 – (11,349,000 x 12 / 100)
= 15,27,000 – 13,61,880 = 1,65,120.
No, after comparing Residual Income of 2014 and 2015 it is clear that the company’s
performance has not been improved..
Consider the following information for Executive Electronics 1231.pdf
1. Consider the following information for Executive Electronics: 12/31/2014 12/31/2015 Total
assets $12,000,000 $11,900,000 Noninterest-bearing current liabilities 571,000 551,000 Net
income 777,000 858,000 Interest expense 2,320,000 320,000 Tax rate 40% 40% Required rate of
return 10% 12% Evaluate the company in terms of residual income (RI), which is equivalent to
EVA since there are no adjustments for accounting distortions. (Enter negative answers
preceeding either - sign, e.g. -45 or in parentheses, e.g. (45).) 2014 2015 Residual income $ $
While income has increased in fiscal 2015, is it clear that the company’s performance has
improved?
Solution
Formulae of Residual Income (RI) = A (B × C)
In formula,
A = Department's net operating income;
B = Minimum required return on assets; and
C = Average operating assets of the department
Residual Income in 2014 =
First of all calculate operating income = (7,77,000 x 100 /60) + 2,32,000
= 12,95,000 + 2,32,000 = 15,27,000.
Operating Assets = 12,000,000 – 5,71,000 = 11,429,000
Residual Income = 15,27,000 – (11,429,000 x 10 / 100)
= 15,27,000 – 11,42,900 = 3,84,100.
Residual Income in 2015 =
First of all calculate operating income = (8,58,000 x 100 /60) + 3,20,000
= 14,30,000 + 3,20,000 = 17,50,000.
Operating Assets = 11,900,000 – 5,51,000 = 11,349,000
Residual Income = 17,50,000 – (11,349,000 x 12 / 100)
= 15,27,000 – 13,61,880 = 1,65,120.
No, after comparing Residual Income of 2014 and 2015 it is clear that the company’s
performance has not been improved.
