Question

Which of the following formula elements is not used in calculating the accounting rate of

return?
A. operating income.
B. a present value factor.
C. depreciation expense.
D. average investment.

Answer 1

The accounting rate of return (ARR) calculation does not include a present value factor. ARR focuses on accounting profit and average investment, excluding the time value of money consideration.

Step-by-step explanation:

The formula for the accounting rate of return (ARR) does not use a present value factor. ARR is a method to determine the profitability of an investment by considering the average annual operating income and the average investment. It takes into account the accounting profit, which is total revenues minus explicit costs, including depreciation, but it does not consider the time value of money, hence, a present value factor isn't used. Instead, ARR is calculated using the average profit and the average investment to determine the rate of return over the investment's life.