The average accounting rate of return:
A) Is actually based more on financial values than on accounting values.
B) Measures net income against the market value of a firm.
C) Is highly recommended by financial professionals as one of the two best methodologies used in the analysis of independent projects.
D) Is the primary methodology used in analyzing independent projects.
E) Is similar to the return on assets ratio.

Question

Quizplus · Accepted Answer

The average accounting rate of return (ARR) compares the average annual profit (or net income) of an investment to the initial investment cost or the average investment value over the period. This is similar to the return on assets (ROA) ratio, which measures a company's profitability in relation to its total assets. Both focus on accounting values rather than market values or cash flows, making choice E correct.

The Average Accounting Rate of Return