The accounting rate of return is not a true return because it simply averages numbers from a firm's balance sheet and income statement.

Question

Quizplus · Accepted Answer

The accounting rate of return (ARR) is a financial analysis tool used to evaluate the profitability of a project or investment. It is calculated by dividing the average annual profit generated by an investment by the initial investment or capital outlay. However, the ARR does not take into account the time value of money, inflation, or the cost of financing so it is not a true return measure. Additionally, the ARR is based on accounting numbers that may be manipulated or biased, so it should be used in conjunction with other financial metrics to make informed investment decisions.

The Accounting Rate of Return Is Not a True Return