AICPA Business Environment and Concepts 2 — Questions and Answers
Question 1: A company's current ratio is 2.5 and its quick ratio is 1.1. Which conclusion is most supported?
- The company has significant inventory relative to current assets (Correct answer)
- The company has no long-term debt
- The company is highly profitable
- The company's receivables are uncollectible
Correct answer: The company has significant inventory relative to current assets
A large gap between current ratio and quick ratio indicates substantial inventory in current assets, since quick ratio excludes inventory.
Question 2: Under COSO's Enterprise Risk Management framework, which component involves identifying potential events that could affect the entity?
- Control activities
- Event identification (Correct answer)
- Risk assessment
- Information and communication
Correct answer: Event identification
Event identification is the COSO ERM component focused on identifying internal and external events that may affect the entity's objectives.
Question 3: Which type of organizational structure groups employees by function such as marketing, finance, and operations?
- Divisional structure
- Matrix structure
- Functional structure (Correct answer)
- Network structure
Correct answer: Functional structure
A functional structure organizes employees into departments based on their specialized roles or functions within the organization.
Question 4: In a make-or-buy decision, which cost is most relevant to the analysis?
- Sunk costs already incurred
- Allocated fixed overhead that will continue regardless
- Incremental variable costs of manufacturing (Correct answer)
- Historical depreciation on existing equipment
Correct answer: Incremental variable costs of manufacturing
Incremental variable costs are relevant because they change depending on whether the product is made internally or purchased externally.
Question 5: A firm has operating leverage of 4. If sales increase by 10%, operating income will increase by approximately:
- 4%
- 10%
- 40% (Correct answer)
- 14%
Correct answer: 40%
Operating leverage multiplies the percentage change in sales by the degree of operating leverage: 10% × 4 = 40%.
Question 6: Which IT control is designed to prevent unauthorized users from accessing a system?
- Detective control
- Corrective control
- Preventive control (Correct answer)
- Compensating control
Correct answer: Preventive control
Preventive controls, such as passwords and access restrictions, are designed to stop unauthorized access before it occurs.
Question 7: Porter's Five Forces model analyzes industry competitiveness. Which force refers to the ability of customers to negotiate lower prices?
- Threat of new entrants
- Bargaining power of buyers (Correct answer)
- Threat of substitutes
- Rivalry among existing competitors
Correct answer: Bargaining power of buyers
Bargaining power of buyers describes how much leverage customers have to push for lower prices, better quality, or more services.
AICPA Business Environment and Concepts 2
A company's current ratio is 2.5 and its quick ratio is 1.1.
Which conclusion is most supported?