What is the primary shortcoming of the average accounting rate of return from a financial perspective?
A)The lack of use in the business world
B)The lack of a clear-cut decision rule
C)The degree of the calculation difficulty
D)The degree of estimation involved with the initial cost
E)The use of net income rather than cash flows

Question

Quizplus · Accepted Answer

The primary shortcoming of the average accounting rate of return is the use of net income rather than cash flows. This can lead to misleading results as net income can be influenced by non-cash items such as depreciation and amortization. Cash flows are a better measure of a project's profitability and should be used instead of net income.

What Is the Primary Shortcoming of the Average Accounting Rate