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Accounting: Tools for Business Decision Making

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SOLUTIONS TO PROBLEMS PROBLEM 1-1C (a) The fact that the combined business expects that it will need to raise significant funds in the near future makes the corporate form more desirable in this case. (b) The concern over legal liability would make the corporate form a better choice over a partnership. Also, the corporate form will allow the busi- ness to raise cash more easily, which may be of importance in a rapidly growing business. (c) It is likely that this business would form as a partnership. Its needs for additional funds would probably be minimal in the foreseeable future. Also, the three know each other well and would appear to be contri- buting equally to the firm. Service firms, like consulting businesses, are frequently formed as partnerships. (d) One way to ensure control would be for Ben to form a sole proprie- torship. However, in order for this business to thrive it will need a substantial investment of funds early. This would suggest the corpo- rate form of business. In order for Ben to maintain control over the business he would need to own more than 50 percent of the voting shares of common stock. In order for the business to grow, he may have to be willing to give up some control. (e) Chad should run his business as a sole proprietor. He has no real need to raise funds, and he doesn’t need the expertise provided by other partners. The sole proprietorship form would provide the easiest form. One should avoid a more complicated form of business unless the characteristics of that form are needed. 1-1
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PROBLEM 1-2C (a) In deciding whether to extend credit for 30 days you would be most interested in the balance sheet because the balance sheet shows the assets on hand that would be available for settlement of the debt in the near-term. (b) In purchasing an investment that will be held for an extended period, the investor must try to predict the future performance of Home Depot. The income statement provides the most useful information for predicting
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KIMMEL_Acct_2e_ProblemCSolutions_ch01 - SOLUTIONS TO...

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