Discuss AICPA CPA-Business Exam Topic 2 Question 130

All of the following capital budgeting analysis techniques use cash flows as the primary basis for the calculation, except for the:

ANet present value.

BInternal rate of return.

CDiscounted payback period.

DAccounting rate of return.

Suggested Answer: D

Choice 'd' is correct. The accounting rate of return does not use cash flows as the primary basis for the calculation. It measures the accrual accounting return instead of cash flows:

Choice 'a' is incorrect. Net present value method discounts cash flows for an investment over its life to time period zero using a desired or minimum rate of return.

Choice 'b' is incorrect. Internal rate of return (IRR) determines the compound interest rate of an investment where the present value of the cash inflows equals the present value of the cash outflows. The IRR is the discount rate that results in a net present value of zero.

Choice 'c' is incorrect. The discounted payback period is the time period required for discounted cash inflows to equal the initial investment. The time value of money is considered.

Get Premium CPA-Business Questions as Interactive Web-Based Practice Test or PDF Real Exam Format Detailed Explanations Instant Access Get Your Practice Test

12 comments · newest first

Elin 1 month ago

Right! The others all consider cash flows directly.

Tori 1 month ago

Agreed! AARR uses accounting profits, not cash.

Jettie 1 month ago

I think the answer is D) Accounting rate of return. It doesn't focus on cash flows.

Tennie 2 months ago

I’m surprised people still confuse these methods!

Alton 2 months ago

Yup, D is definitely the right choice!

Kallie 2 months ago

Wait, I thought all of them used cash flows?

Curtis 2 months ago

Totally agree, it's based on accounting profits, not cash flows.

Kati 2 months ago

D) Accounting rate of return is the odd one out.

Lai 2 months ago

I definitely remember cash flows being a key part of NPV and IRR, but I can't quite recall how the accounting rate of return fits in.

Corrie 3 months ago

I'm a bit confused because all these terms sound similar, but I feel like the accounting rate of return is the odd one out.

Nicolette 3 months ago

I think we did a practice question similar to this, and I recall that the accounting rate of return uses accounting profits instead of cash flows.

Sherita 3 months ago

I remember that NPV, IRR, and discounted payback all focus on cash flows, but I'm not entirely sure about the accounting rate of return.

AICPA CPA-Business Exam - Topic 2 Question 130 Discussion