Chapter+1+Sol+Q+BE+DOIT-1 - Chapter 1 Questions Brief...

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Chapter 1 Questions, Brief Exercises, Just Do IT solutions ANSWERS TO QUESTIONS 1. The three basic forms of business organizations are (1) sole proprietorship, (2) partnership, and (3) corporation. 2. 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. 3. Proprietorships and partnerships receive favorable tax treatment compared to corporations and are easier to form than corporations. They are also owner controlled. Disadvantages of proprietorships and partnerships are unlimited liability (proprietors/partners are personally liable for all debts) and difficulty in obtaining financing compared to corporations. 4. 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. 5. Internal users are managers who plan, organize, and run a business. To assist management, accounting provides timely internal reports. Examples include financial comparisons of operating alternatives, projections of income from new sales campaigns, forecasts of cash needs for the next year, and financial statements. 6. External users are those outside the business who have either a present or potential direct financial interest (investors and creditors) or an indirect financial interest (taxing authorities, regulatory agencies, labor unions, customers, and economic planners). 7. 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. 8. (a) Income statement. (d) Balance sheet. (b) Balance sheet. (e) Balance sheet. (c) Income statement. (f) Balance sheet.
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9. 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 make debt payments at risk. 10. 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 earnings account which appears in the
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Chapter+1+Sol+Q+BE+DOIT-1 - Chapter 1 Questions Brief...

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