Which capital budgeting method uses accrual accounting, rather than net cash inflows, as a basis for calculations?

Question

Duncan

Business

26 March, 15:07

Which capital budgeting method uses accrual accounting, rather than net cash inflows, as a basis for calculations?

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Answers (2)

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Lainey Castro · Answer 1

Annual rate of return method

Explanation:

Annual rate of return method unlike some other capital budgeting techniques uses a data that is consistent with accrual concepts. the income it uses is the estimated annual net income of the entity.

Below is the formula used for Annual rate of return method:

Annual rate of return = Estimated Annual net income/Average Investment.

It ignore the cash inflow.

Valerie Young · Answer 2

Accounting Rate of Return

Explanation:

Accounting Rate of Return is the capital budgeting method that uses accrual accounting, rather than net cash inflows, as a basis for calculations.

The Accounting rate of return (ARR) capital budgeting methodology and a financial ratio which takes no recognition of time value of money. It is calculated based on the net income of the capital investment (s) proposed.

In conclusion the reason why it is argued that the Accounting Rate of Return uses accrual accounting is because the net income from the investment which is used in its appraisal, is derived based on the accrual basis since such net income is recognized when earned not when received