Q14RQ - Horngren'S Financial And Managerial Accounting

Question

 What is the decision rule for ARR?

Step-by-Step Solution

Answer

Answer

If the ARR achieves or exceeds the statutory accounting rate of return, the project is only acknowledged.

Step 1: Meaning of ARR

The effect of the investment on the company's accrual-based income is depicted by the ARR. Rather than using the net inflow of cash and its predictions, the accounting rate of return primarily employed accrual accounting.

Step 2: Decision rule for ARR

The accounting rate of return decision rule is: 

Invest if the predicted accounting rate of return matches or exceeds the necessary rate of return. Do not invest if the rate of return is less than the needed rate of return.