The shortcoming(s)of the average accounting return (AAR)method is (are):
A)the use of net income instead of cash flows.
B)the pattern of income flows has no impact on the AAR.
C)there is no clear-cut decision rule.
D)All of the above.
E)None of the above.

Question

Quizplus · Accepted Answer

All three options A, B, and C are the shortcomings of the AAR method. The AAR uses net income instead of cash flows, which can be misleading as it does not reflect actual cash flows. The pattern of income flows does not have any impact on the AAR, which implies that a project that generates the same average income may be preferable to a project that generates the same income in different patterns. Finally, there is no clear-cut decision rule for accepting or rejecting a project based on the calculated AAR. Hence, the best choice is D, as all three options A, B, and C are the shortcomings of the AAR method.

The Shortcoming(s)of the Average Accounting Return (AAR)method Is (Are)