The shortcoming(s) of the average accounting return (AAR) method is (are):
A)the use of net income instead of cash ﬂows.
B)the pattern of income ﬂows has no impact on the AAR.
C)there is no clear-cut decision rule.
D)All of the above.
E)None of the above.

Question

Quizplus · Accepted Answer

All of the above are shortcomings of the average accounting return (AAR) method. Using net income instead of cash flows can be misleading as it does not reflect the actual cash generated by the project. The pattern of income flows can impact the value of money over time and thus affect investment decisions, but the AAR method does not consider this. Additionally, there is no clear-cut decision rule for determining whether a project's AAR is acceptable or not.

The Shortcoming(s) of the Average Accounting Return (AAR) Method Is