Chapter 1 Questions, Brief Exercises, Just Do IT solutions
ANSWERS TO QUESTIONS
The three basic forms of business organizations are (1) sole proprietorship, (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
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.
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
accounting provides timely internal reports. Examples include financial
alternatives, projections of income from new sales campaigns, forecasts of cash
needs for the next year, and financial statements.
External users are those outside the business who have either a present or
financial interest (investors and creditors) or an indirect financial interest (taxing
authorities, regulatory agencies, labor unions, customers, and economic
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.