Question

How do you calculate a change in residual earnings? Also how do you upload a file or paste in the question area?

Answer 1

Residual Earnings can be calculated on the basis of the following formula;

Residual Income = Net operating Income - ( Minimum required rate of return * Operating cost of Assets)

Residual Income returns us with the value that the business is making over and above its obligations, or in other words the amount of income that is left with a business after all capital costs to generate that ncome have been paid for. This is an important metric for any business as it tells them whether the business is actually making or losing money or if the capital employed in the business can be used more efficiently somewhere else.

To answer your question about how to calculate the change in residual earnings you essentially have 3 variables as per the equation above that affect residual income any change in these 3 will lead to a change in Residual income.

However, if you are looking at the financial statements and want to find out the change in residual income you can refer to the note pertaining to item 'Reserves&Surplus' In the balance sheet and see how much money was transferred to the account in the current year and compare it with the previous year figure.

I hope this answers your query.