Question
orations Which of the following is/are a disadvantage of accounting rate of return (ARR)? (Select the correct answer from the options below the statements) (1) It does not consider the time value of money (2) It is relatively simple to use (3) It can be manipulated by managers (1) only (1) and (2) All of the above
Answer
4.1
(222 Votes)
Xavier
Professional · Tutor for 6 years
Answer
(1) and (3)
Explanation
## Step1: Understanding the questionThe question asks us to select the correct options/statement(s) that truly indicates the disadvantage of using the accounting rate of return (ARR). ## Step2: Analyzing the arr disadvantagesLet's scrutinize each statement given based on the characteristics of ARR: ### (1) It does not consider the time value of money ARR method primarily bases its calculations on accounting profits ignoring cash flows and the future value considerations of money. This remark outlines a significant disadvantage of ARR hence it's correct. ### (2) It is relatively simple to use This statement represents an advantage rather than a disadvantage of the ARR. Its simplicity in application eases the work of any investor. Thus, this statement is not a drawback; hence, incorrect. ### (3) It can be manipulated by managers This statement is also a disadvantage faced by users of ARR. It comprises accounting figures, which gives room for results manipulation based on an individual’s judgment.