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Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773

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BuyFindarrow_forward

Managerial Accounting: The Corners...

7th Edition
Maryanne M. Mowen + 2 others
ISBN: 9781337115773
Textbook Problem
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A fire insurance policy on a manufacturing plant is an example of a risk reduction alternative that would reduce which component of the inherent risk of a plant fire

  1. a. Likelihood only
  2. b. Impact only
  3. c. Both likelihood and impact
  4. d. Neither likelihood nor impact

To determine

Identify the component of the inherent risk which would be reduced by the fire insurance policy.

Explanation

Inherent Risk:

Inherent risk is a risk that prevails in a system before any control measure is adopted within an organization.

b.

Inherent risk is assessed by estimating two types of uncertainties;first, likelihood of the risk and second, the effect on organization in the event of its occurrence.

The fact that an organization has taken a fire insurance policy would not reduce the chances of breaking a fire. However, it would reduce the financial impact on organization. Therefore, this is the correct option.

a.

The fact that an organization has taken a fire insurance policy would not reduce the chances of breaking a fire...

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