Which type of accounting would you develop to understand the effect on the business of a risk being realized?

• A. Tax accounting
• B. Financial accounting
• C. Management accounting
• D. Forensic accounting

Answer: (C)

Verified step by step guidance

1. Understand the context of the question: The problem is asking which type of accounting is best suited to analyze the effect of a risk being realized on a business.
2. Review the definitions of the accounting types provided: Tax accounting focuses on compliance with tax laws, financial accounting deals with reporting financial information to external stakeholders, forensic accounting investigates financial discrepancies, and management accounting is used for internal decision-making and analyzing business operations.
3. Identify the purpose of management accounting: Management accounting is specifically designed to help managers make informed decisions by analyzing internal data, including the impact of risks and uncertainties on the business.
4. Explain why management accounting is the correct answer: When a risk is realized, management accounting provides tools such as variance analysis, cost-benefit analysis, and risk assessment to evaluate the financial impact and guide decision-making.
5. Conclude that management accounting is the appropriate type of accounting for understanding the effect of a risk being realized, as it focuses on internal analysis and decision-making processes.