Question

How does the accounting rate of return differ from the return on investment formula? Multiple Choice

a. They are not different; both are calculated by dividing net operating income by initial investment.
b. The numerator in each formula differs; accounting rate of return divides net operating Income by Initial Investment and return on investment divides gross operating Income by Initial Investment
c. The numerator in each formula differs, accounting rate of return divides net operating income by average invested assets, while return on investment divides gross operating income by average invested assets.
d. The denominator in each formula differs: accounting rate of return divides net operating income by initial investment, while return on investment divides net operat ng income by average invested assets

Answer 1

The Accounting Rate of Return (ARR) and the Return on Investment (ROI) differ in their calculations; ARR divides net operating income by average invested assets, while ROI uses initial invested assets in the denominator.

Step-by-step explanation:

The Accounting Rate of Return (ARR) and the Return on Investment (ROI) are both measures of the profitability of an investment. However, they differ primarily in how the return and the average investment are calculated within their formulas.

The correct answer to the question is: The numerator in each formula differs, accounting rate of return divides net operating income by average invested assets, while return on investment divides net operating income by average invested assets. Therefore, option (c) is the correct choice. While both use net operating income in the numerator, ARR uses average invested assets in the denominator, suggesting it measures the return over the asset's useful life. In contrast, ROI typically measures the return for a particular period using the initial invested assets as the denominator.