ACCA Financial Management (F9) Certification Practice Exam

What is the formula for the Accounting Rate of Return (ARR)?

1. (Average investment/Average annual profit) x 100

2. (Average annual profit from investment/Initial Investment) x 100

3. (Initial Investment/Average annual profit from investment) x 100

4. (Average annual profit from investment/Initial and final investment) x 100

The correct answer is: (Average annual profit from investment/Initial Investment) x 100

The formula for the Accounting Rate of Return (ARR) is correctly identified as (Average annual profit from investment/Initial Investment) x 100. This ratio measures the profitability of an investment by comparing the average annual profit it generates to the initial capital invested. In practical terms, the ARR provides insight into how effectively an investment is generating returns over a specific period. It is particularly useful in assessing the attractiveness of an investment opportunity relative to others by expressing the expected return as a percentage of the initial investment. Using average annual profit ensures that the calculation provides a consistent view of profitability across the investment's lifespan, rather than focusing on fluctuating profit figures. This makes it a straightforward tool for decision-makers in evaluating potential projects or investments. Other formulas presented relate to investment metrics in various ways but do not accurately capture the essence of the ARR. For example, using average investment instead of initial investment would lead to a different perspective that may not align with how ARR is traditionally calculated. Thus, option B stands out as the correct representation of the Accounting Rate of Return.