CPA CPA Business Environment & Concepts 1 — Questions and Answers
Question 1: Which economic concept describes the additional cost of producing one more unit of a good or service?
- Marginal cost (Correct answer)
- Fixed cost
- Sunk cost
- Opportunity cost
Correct answer: Marginal cost
Marginal cost is the incremental cost incurred when producing one additional unit of output.
Question 2: Under the COSO framework, which component addresses an entity's overall attitude toward risk?
- Control activities
- Risk appetite (Correct answer)
- Information & communication
- Monitoring
Correct answer: Risk appetite
Risk appetite is the amount of risk an entity is willing to accept in pursuit of its strategic objectives, as defined within the COSO ERM framework.
Question 3: Which form of business organization provides limited liability to all owners while allowing pass-through taxation?
- General partnership
- S Corporation (Correct answer)
- Sole proprietorship
- C Corporation
Correct answer: S Corporation
An S Corporation provides limited liability protection to shareholders while passing income and losses directly to shareholders' personal tax returns.
Question 4: In a perfectly competitive market, a firm's demand curve is best described as:
- Downward sloping
- Upward sloping
- Perfectly elastic (horizontal) (Correct answer)
- Perfectly inelastic (vertical)
Correct answer: Perfectly elastic (horizontal)
In perfect competition, individual firms are price takers, so they face a perfectly elastic (horizontal) demand curve at the market price.
Question 5: Which concept states that a business is assumed to continue operating indefinitely unless there is evidence to the contrary?
- Matching principle
- Going concern (Correct answer)
- Materiality
- Conservatism
Correct answer: Going concern
The going concern assumption holds that a business will continue to operate for the foreseeable future, justifying the use of historical cost accounting.
Question 6: Which organizational structure groups employees by function, such as marketing, finance, and operations?
- Divisional structure
- Matrix structure
- Functional structure (Correct answer)
- Flat structure
Correct answer: Functional structure
A functional structure organizes employees based on their specialized roles or departments, promoting efficiency through expertise.
CPA CPA Business Environment & Concepts 1
Which economic concept describes the additional cost of producing one more unit of a good or service?