Q13RQ

Question

How is ARR calculated?

Step-by-Step Solution

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Answer

Answer

$A R R = \frac{A v e r a g e a n n u a l o p e r a t i n g i n c o m e}{A v e r a g e a m o u n t i n v e s t e d}$

1Step 1: Meaning of ARR

ARR depicts the effect of the investment on the company's accrual-based income.

2Step 2: Calculation of ARR

ARR is calculated using accrual accounting rather than net cash inflows. It is required for users of financial statements. Calculation of ARR helps the companies to analyze the profitability of the investment.

The formula that is involved in finding ARR is as follows:

$A R R = \frac{A v e r a g e a n n u a l o p e r a t i n g i n c o m e}{A v e r a g e a m o u n t i n v e s t e d}$

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