Financial Accounting- Tools for Business Decision Making Chapter 1 Exam Questions Answered
Correctly Graded A+
sole proprietorship - Answers a business owned by one person
Pros of a sole proprietorship - Answers •It is simple to set up
• It gives you control over the business, and
• More favorable tax treatment than corporations
Cons of forming a sole proprietorship - Answers The proprietor is personally liable for all debts and legal
obligations of the business
Partnership - Answers A business owned by two or more persons associated as partners.
Reason for setting up a partnership - Answers One individual does not have enough economic resources
to initiate or expand the business.
Pros of forming a partnership - Answers • Partners sometimes bring unique skills or resources to the
partnership
• More favorable tax treatment than corporations
Cons of forming a partnership - Answers Partners are personally liable for all debts and legal obligations
of the business
Corporation - Answers A business organized as a separate legal entity owned by stockholders
Pros of forming a corporation - Answers • Shares of stock are easy to sell (transfer ownership)
• Individuals can become stock holders by investing relatively small amounts of money
• It is easier for corporations to raise funds
• Corporate stockholders have no personal legal liability
Cons of forming a corporation - Answers • Corporate stockholders generally pay higher taxes
What is the purpose of financial information? - Answers To provide inputs for decision-making.
What is accounting? - Answers The information system that identifies, records and communicates the
economic events of an organization to interested users.
Who are the users of financial information? - Answers They can be divided broadly into two groups:
internal users and external users.
Who are internal users? - Answers Managers who plan, organize and run a business.
Correctly Graded A+
sole proprietorship - Answers a business owned by one person
Pros of a sole proprietorship - Answers •It is simple to set up
• It gives you control over the business, and
• More favorable tax treatment than corporations
Cons of forming a sole proprietorship - Answers The proprietor is personally liable for all debts and legal
obligations of the business
Partnership - Answers A business owned by two or more persons associated as partners.
Reason for setting up a partnership - Answers One individual does not have enough economic resources
to initiate or expand the business.
Pros of forming a partnership - Answers • Partners sometimes bring unique skills or resources to the
partnership
• More favorable tax treatment than corporations
Cons of forming a partnership - Answers Partners are personally liable for all debts and legal obligations
of the business
Corporation - Answers A business organized as a separate legal entity owned by stockholders
Pros of forming a corporation - Answers • Shares of stock are easy to sell (transfer ownership)
• Individuals can become stock holders by investing relatively small amounts of money
• It is easier for corporations to raise funds
• Corporate stockholders have no personal legal liability
Cons of forming a corporation - Answers • Corporate stockholders generally pay higher taxes
What is the purpose of financial information? - Answers To provide inputs for decision-making.
What is accounting? - Answers The information system that identifies, records and communicates the
economic events of an organization to interested users.
Who are the users of financial information? - Answers They can be divided broadly into two groups:
internal users and external users.
Who are internal users? - Answers Managers who plan, organize and run a business.
