Multiple Choice
Which type of accounting is primarily responsible for establishing management reserves and identifying contingency reserves within an organization?
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1. Introduction to Accounting
Types of Accounting
Multiple Choice
Which of the following capital budgeting methods focus on cash flows rather than incremental operating income?
A
Net Present Value (NPV) and Internal Rate of Return (IRR)
B
Variable Costing
C
Accounting Rate of Return (ARR)
D
Absorption Costing
Verified step by step guidance1
Understand the concept of capital budgeting methods: Capital budgeting methods are techniques used to evaluate investment opportunities and decide whether they are worth pursuing. These methods often focus on either cash flows or accounting-based measures.
Identify the methods listed in the problem: The methods mentioned are Net Present Value (NPV), Internal Rate of Return (IRR), Variable Costing, Accounting Rate of Return (ARR), and Absorption Costing.
Clarify the focus of NPV and IRR: Both Net Present Value (NPV) and Internal Rate of Return (IRR) are capital budgeting methods that focus on cash flows. NPV calculates the present value of future cash flows minus the initial investment, while IRR identifies the discount rate that makes the net present value of cash flows equal to zero.
Explain the focus of ARR, Variable Costing, and Absorption Costing: Accounting Rate of Return (ARR) focuses on incremental operating income rather than cash flows. Variable Costing and Absorption Costing are methods of inventory costing and are not directly related to capital budgeting decisions.
Conclude the distinction: Since the question asks for methods that focus on cash flows, the correct answers are Net Present Value (NPV) and Internal Rate of Return (IRR), as they directly evaluate cash inflows and outflows associated with an investment.
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