The Average Accounting Return (AAR) Rule Can Be Best Stated

question 401

Multiple Choice

The average accounting return (AAR) rule can be best stated as:

• A) An investment is acceptable if its AAR is less than a target AAR.
• B) An investment is acceptable if its AAR exceeds a target AAR.
• C) An investment is acceptable if its AAR exceeds the firm's return on equity (ROE).
• D) An investment is acceptable if its AAR is less than the firm's return on assets (ROA).

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Definitions:

Inventory

Assets held for sale in the ordinary course of business, in the process of production for such sale, or in the form of materials or supplies to be consumed in the production process or rendering of services.

FIFO Firms

FIFO (First-In, First-Out) firms refer to businesses that use the FIFO accounting method to manage inventory, implying that the first items purchased are the first ones sold.

Realized Holding Gains

Gains that are recognized when assets such as investments are actually sold for more than their cost, reflecting actual rather than potential profit.

Inventory Costs

Inventory costs include all expenses related to acquiring, holding, and managing inventory, including purchase costs, storage, and handling.