The Average Accounting Return (AAR) is calculated by taking the average net income and dividing it by the average ____ value.

• A. market
• B. book
• C. cash
• D. sales

Answer: (B)

Verified step by step guidance

1. Understand the concept of Average Accounting Return (AAR): AAR is a financial metric used to evaluate the profitability of an investment. It is calculated by dividing the average net income by the average book value of the investment.
2. Clarify the term 'average net income': This refers to the mean of the net income values over a specific period, typically calculated as the sum of net incomes for each year divided by the number of years.
3. Clarify the term 'average book value': This refers to the mean of the book values of the investment over the same period. Book value is the value of an asset as recorded in the company's accounting books, not its market value.
4. Set up the formula for AAR: \( \text{AAR} = \frac{\text{Average Net Income}}{\text{Average Book Value}} \). This formula highlights the relationship between profitability and the investment's accounting value.
5. Ensure the distinction between book value and other options: Book value is used in the denominator because it reflects the accounting perspective, whereas market value, cash, or sales are not relevant for this calculation.