Question
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 None of the above
Answer
4.1
(200 Votes)
Vianne
Master · Tutor for 5 years
Answer
# Explanation:## Step 1:The aim here is to determine which of the given options points to a drawback of using the accounting rate of return (ARR). ## Step 2:Accounting Rate of Return (ARR) is a financial metric mostly used to compare profitability of investments. It calculates the return on an investment based on its profit and nothing else. ## Step 3:Datum analysis:* Option (1): Statement "It does not consider the time value of money" holds as a disadvantage of calculating ARR, because it does not take into account the concept that money available today is worth more than the same amount in the future due to its potential earning capacity. * Option (2): Statement "It is relatively simple to use" is true, but it is not a disadvantage, instead simplicity is normally seen as a strength or advantage.* Option (3): Statement "It can be manipulated by managers" is also rightly pointing at one of disadvantages of ARR. Because of its simplicity and exclusion of elements like time value of money, inflation etc. it can be subject to manipulations to reflect a rosy picture.# Answer:Answer: (1) only.