Chapter 1 - CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT...

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(Difficulty Levels: Easy, Easy/Medium, Medium, Medium/Hard, and Hard) Note to Professors: We designated most of these questions as being MEDIUM. However, their difficulty as seen by students will depend on (1) what was discussed in class and (2) how long students have to answer the questions. If time is not an issue, then many of the questions should be classified as EASY, but under exam conditions with time pressure, they might be regarded as being HARD. So, consider the amount of time students have when selecting questions for an exam. Multiple Choice: Conceptual Firm organization Answer: e EASY 1 . Which of the following statements is CORRECT? a. One of the disadvantages of incorporating your business is that you become subject to liabilities in the event of bankruptcy. b. Sole proprietorships are subject to more regulations than corporations. c. In any partnership, every partner has the same rights, privileges, and liability exposure as every other partner. d. Corporations of all types are subject to the corporate income tax. e. Sole proprietorships and partnerships generally have a tax advantage over corporations. Firm organization Answer: c EASY 2 . Which of the following statements is CORRECT? a. One of the advantages of the corporate form of organization is that it avoids double taxation. b. It is easier to transfer one’s ownership interest in a partnership than in a corporation. c. One of the disadvantages of a sole proprietorship is that the proprietor is exposed to unlimited liability. d. One of the advantages of a corporation from a social standpoint is that every stockholder has equal voting rights, i.e., “one person, one vote.” e. Corporations of all types are subject to the corporate income tax. Chapter 1: An Overview of Financial Management Page 1 CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT
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Firm organization Answer: a EASY 3 . Which of the following statements is CORRECT? a. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a partnership. b. Corporations face fewer regulations than sole proprietorships. c. One disadvantage of operating a business as a sole proprietor is that the firm is subject to double taxation, at both the firm level and the owner level. d. It is generally less expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. e. If a partnership goes bankrupt, each partner is exposed to liabilities only up the amount of his or her investment in the business. Firm organization Answer: a EASY 4 . Cheers Inc. operates as a partnership. Now the partners have decided to convert the business into a corporation. Which of the following statements is CORRECT? a. Cheers’ shareholders (the ex-partners) will now be exposed to less
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Chapter 1 - CHAPTER 1 AN OVERVIEW OF FINANCIAL MANAGEMENT...

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