The accounting rate of return is calculated as:
A) The after-tax income divided by the total investment.
B) The after-tax income divided by the annual average investment.
C) The cash flows divided by the annual average investment.
D) The cash flows divided by the total investment.
E) The annual average investment divided by the after-tax income.

Question

Quizplus · Accepted Answer

The accounting rate of return is calculated by dividing the average annual income by the average investment. It is expressed as a percentage. Choice A is incorrect as it doesn't take into account the time period for the investment. Choice C and D are incorrect as they divide the cash flows by investment, which may not give an accurate picture of the profitability of the investment. Choice E is incorrect as it would give an inverse ratio of the actual accounting rate of return.

The Accounting Rate of Return Is Calculated As