Which of the Following Statements Is True About the Effective

question 98

Multiple Choice

Which of the following statements is true about the effective annual rate (EAR) ?

• A) The effective annual interest rate (EAR) is defined as the annual growth rates that do not take compounding into account.
• B) The EAR is the annualized interest rate using simple interest. It ignores the interest earned on interest associated with compounding periods of less than one year.
• C) The EAR is the simple interest charged per period multiplied by the number of periods per year.
• D) The EAR is the interest rate actually paid (or earned) after accounting for compounding.

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Definitions:

Prospective

Relating to or effective in the future, often used in planning and forecasting scenarios.

Adjusting Entry

A journal entry made in accounting records at the end of an accounting period to allocate income and expenditure to the period in which they actually occurred.

Depreciation Expense

The portion of the cost of a fixed asset that is considered consumed in each period of the asset's useful life.

Retrospective Adjustments

Adjustments made to the financial statements of prior periods when adopting a new accounting principle, as if that principle had always been applied.