John, the controller at one of the Metropolis Health System hospitals, has used
ID: 2448388 • Letter: J
Question
John, the controller at one of the Metropolis Health System hospitals, has used the unadjusted rate of return method when preparing a report submitted to the Executive Committee. The Committee Chairman, who has a reputation as a know-it-all, questions the use of the unadjusted rate of return method. At this point the Vice President of Finance jumps in and says he approves of using this method: first because the information necessary for the computation is obtained from existing financial statements, second because it is one of the recognized methods of evaluating the use of the hospital's money, and third because it is easy to understand. Is the Vice President correct in all three points?
Explanation / Answer
The method is also known as Accounting Rate of Return (ARR) Method because accounting information as revealed by theFINANCIAL statement are used to measure the profitability of the inverstment proposals.
Unadjusted Rate of Reurn = Average Income/ Average Investment
We can say that vice president is correct in suggesting the unadjusted rate of return method.
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