Unformatted text preview: (Refer to pp. 559-561) Solutions a. Firm A Firm B Sales revenue 300 300 Cost of goods sold 230 190 Income 70 110 Return on book value Firm A: 70/230 30.4% Firm B: 110/190 57.9% Residual earnings Firm A (70 – (0.12 x 230) 42.4 Firm B (110 – (0.12 x 190) 87.2 b. The value added for both firms is 42.4, that is, the residual earnings calculated for Firm A. Firm B’s residual income includes accounting value added as well as economic value added. By writing down book value, Firm B has done two things. First it has decreased cost of goods sold in 2004 (and thus increased earnings to 110) and, second, it has increased the rate of return (to 57.9%) by comparing those higher earnings to lower book values from the write off....
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- Spring '10
- Revenue, Generally Accepted Accounting Principles, Value added, residual earnings