Question

1. In preparing the Statement of Cash Flows

	a	deprecation is added to net income when calculating Cash From Operations (under the Indirect Method).
		B.deprecation is added to net income when calculating Cash From Operations (under the Indirect Method) because depreciation is a non-cash expense.
		C. Investing Activities and Financing Activities do not require any adjustments to net income.
	d	All of the above.

2.

Why do some companies prefer the use of residual income over return on investment in decision making?

	a.	The concept.
	b.	ROI can motivate managers to make investment decisions that are not necessarily in the company’s best interest.
	c.	The calculations for economic profit are easier.
	d.	The data needed to calculate return on investment are not always available.

Answer 1

1. In preparing the Statement of Cash Flows

d All of the above.

Under Indirect Method depreciation is added back to Net Income Because Depreciation is a non cash flow item.

Net income is considered only under Cash flow from Operating activities

2.

Why do some companies prefer the use of residual income over return on investment in decision making?.

The calculations for economic profit are easier.

The term residual income is often referred to as abnormal earnings or economic profit it is calculated by Reducing actual profit by Expected profit Based on Return on Investment.