ACCA Advanced Audit and Assurance (AAA) Practice Exam

What does the term “viability” refer to in accounting contexts?

1. A guarantee of profit generation

2. The capacity for an entity to meet obligations

3. An assessment of market risks

4. An analysis of potential revenue streams

The correct answer is: The capacity for an entity to meet obligations

In accounting contexts, the term "viability" primarily refers to the capacity for an entity to meet its financial obligations as they arise. This encompasses not only the current ability to pay debts but also the long-term sustainability of the entity's business model and operational effectiveness. Viability is crucial for stakeholders, such as investors and creditors, as it provides insight into the organization's financial health and its likelihood of continuing operations in the future. A business that is deemed viable can manage its cash flows, has the ability to service its debt, and can adapt to changing market conditions to maintain its financial integrity. Therefore, assessing an entity's viability involves evaluating its financial practices, competitive position, and overall economic environment. The other options delve into specific aspects of financial analysis but do not encapsulate the broader concept of viability in the same comprehensive way. For example, while a guarantee of profit generation could imply viability, it does not account for the ability to manage current obligations. Similarly, assessing market risks or analyzing potential revenue streams are important to understanding different financial dynamics but do not directly define the entity's ability to remain operational and solvent in the long term.