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: Straight Line

Financial Accounting

8. Long Lived Assets

Depreciation: Straight Line

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Multiple Choice

How does depreciation affect the calculation of a project's accounting rate of return (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 calculations, not in ARR.

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

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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 evaluate 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 of a project. It represents the allocation of the cost of a tangible asset over its useful life.

Identify 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.

Clarify why depreciation is relevant to ARR: Unlike cash flow-based metrics, ARR relies on accounting profit, which includes non-cash expenses like depreciation. Therefore, depreciation directly affects the ARR calculation.

Conclude the relationship: Depreciation reduces the average annual accounting profit, which in turn lowers the Accounting Rate of Return (ARR). This is why the correct answer is that depreciation reduces ARR.