ANSWERS TO QUESTIONS
The three basic forms of business organizations are (1) sole proprietorship, (2) partnership,
Advantages of a corporation are limited liability (stockholders not being personally liable
for corporate debts), easy transferability of ownership, and easier to raise funds.
Disadvantages of a corporation are increased taxation and government regulations.
Proprietorships and partnerships receive favorable tax treatment compared to corporations
and are easier to form than corporations. Disadvantages of proprietorships and partnerships
are unlimited liability (proprietors/partners are personally liable for all debts) and difficulty
financing compared to corporations.
Yes. A person cannot earn a living, spend money, buy on credit, make an investment, or
pay taxes without receiving, using, or dispensing financial information. Accounting
provides financial information to interested users through the preparation and distribution
of financial statements.
Internal users are managers who plan, organize, and run a business. To assist management,
accounting provides timely internal reports. Examples include financial comparisons of
alternatives, projections of income from new sales campaigns, and forecasts of cash needs
for the next year.
External users are those outside the business who have either a present or potential
(investors and creditors) or an
indirect financial interest
authorities, regulatory agencies, labor unions, customers, and economic planners).
The three types of business activity are financing activities, investing activities, and
operating activities. Financing activities include borrowing money and selling shares of
stock. Investing activities include the purchase and sale of property, plant, and equipment.
Operating activities include selling goods, performing services, and purchasing inventory.
When a company pays dividends it reduces the amount of assets available to pay creditors.
Therefore banks and other creditors monitor dividend payments to ensure they do not put a
company’s ability to pay debt payments at risk.
Yes. Net income does appear on the income statement—it is the result of subtracting
expenses from revenues. In addition, net income appears in the retained earnings statement
—it is shown as an addition to the beginning-of-period retained earnings. Indirectly, the
net income of a company is also included in the balance sheet. It is included in the retained