The accounting rate of return is based on cash flows rather than net income in its calculation.

Accounting Rate of Return

A financial ratio that measures the expected profitability of an investment, calculated as the average annual profit divided by the initial investment.

Cash Flows

The movement of money into and out of a business, used to assess the company's liquidity, financial health, and profitability over time.

Net Income

The total profit of a company after all expenses, including taxes and interest, have been deducted from total revenue; also known as net earnings or net profit.