Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

8. Long Lived Assets

Depreciation: Summary of Main Methods

Financial Accounting

8. Long Lived Assets

Depreciation: Summary of Main Methods

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Multiple Choice

How does depreciation affect the calculation of a project's accounting rate of return (ARR)?

Depreciation reduces the average annual accounting profit, thereby lowering the ARR.

Depreciation has no effect on the calculation of ARR.

Depreciation increases the average annual accounting profit, thereby increasing the ARR.

Depreciation is only considered in cash flow analysis, not in ARR calculations.

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Verified step by step guidance

Understand the concept of Accounting Rate of Return (ARR): ARR is a financial metric used to measure the profitability of an investment. It is calculated as the average annual accounting profit divided by the initial investment or average investment.

Recognize the role of depreciation in accounting profit: Depreciation is a non-cash expense that reduces the reported accounting profit. It represents the allocation of the cost of a tangible asset over its useful life.

Analyze how depreciation impacts ARR: Since ARR is based on accounting profit, and depreciation reduces accounting profit, the inclusion of depreciation in the calculation will lower the average annual accounting profit, thereby reducing the ARR.

Clarify that depreciation is not excluded from ARR calculations: Depreciation is a key component of accounting profit and is considered in ARR calculations. It is not limited to cash flow analysis.

Conclude that depreciation reduces ARR: The reduction in accounting profit due to depreciation directly impacts the ARR calculation, making it lower than it would be without considering depreciation.