CHAPTER 1
AN OVERVIEW OF FINANCIAL MANAGEMENT
(Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Conceptual
Easy:
Firm organization Answer: c Diff: E
i. Which of the following statements is true?
a. One of the benefits of incorporating your business is that you become entitled to receive
unlimited liability.
b. Sole proprietorships are subject to more regulations than corporations.
c. Sole proprietorships do not have to pay corporate tax.
d. All of the statements above are correct.
e. None of the statements above is correct.
Firm organization Answer: c Diff: E
ii. Which of the following statements is most correct?
a. One of the advantages of the corporate form of organization is that there is no double taxation.
b. The partnership form of organization has easy transferability of ownership.
c. One of the disadvantages of the sole proprietorship form of organi-
zation is that there is unlimited liability.
d. Statements b and c are correct.
e. None of the statements above is correct.
Firm organization Answer: a Diff: E
iii. Which of the following statements is most correct?
a. One advantage of forming a corporation is that you have limited
liability.
b. Corporations face fewer regulations than sole proprietorships.
Chapter 1 - Page 1
,c. One disadvantage of being a sole proprietor is that you have to pay
corporate taxes, even though you don’t realize the benefits of being a
corporation.
d. Statements b and c are correct.
e. None of the statements above is correct.
Chapter 1 - Page 2
,Firm organization Answer: a Diff: E
iv. Until this year, Cheers Inc. was organized as a partnership. This year,
the partners have decided to organize the business as a corporation. As
a result of this change in organizational form, which of the following
statements is most correct?
a. Cheers’ shareholders (the ex-partners) will now have limited liability.
b. Cheers will now be subject to fewer regulations.
c. Cheers will now pay less in taxes.
d. Cheers’ investors will now find it more difficult to transfer ownership.
e. Cheers will now find it more difficult to raise additional capital.
Firm organization Answer: c Diff: E N
v. Which of the following statements is most correct?
a. Corporations generally face fewer regulations than sole proprietor-
ships do.
b. Corporate shareholders have unlimited liability.
c. It is usually easier to transfer ownership in a corporation than it is
to transfer ownership in a sole proprietorship.
d. All of the above statements are correct.
e. None of the above statements is correct.
Corporate form Answer: c Diff: E
vi. Which of the following could explain why a business might choose to organize
as a corporation rather than as a sole proprietorship or a partnership?
a. Corporations generally face fewer regulations.
b. Corporations generally face lower taxes.
c. Corporations generally find it easier to raise capital.
d. Corporations enjoy unlimited liability.
e. Statements c and d are correct.
Corporate form Answer: a Diff: E
vii. Which of the following statements is most correct?
a. One drawback of forming a corporation is that it subjects the firm to additional regulations.
b. One drawback of forming a corporation is that it subjects the firm to limited liability.
c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise
capital.
d. All of the statements above are correct.
Chapter 1 - Page 3
, e. Statements b and c are correct.
Chapter 1 - Page 4
AN OVERVIEW OF FINANCIAL MANAGEMENT
(Difficulty: E = Easy, M = Medium, and T = Tough)
Multiple Choice: Conceptual
Easy:
Firm organization Answer: c Diff: E
i. Which of the following statements is true?
a. One of the benefits of incorporating your business is that you become entitled to receive
unlimited liability.
b. Sole proprietorships are subject to more regulations than corporations.
c. Sole proprietorships do not have to pay corporate tax.
d. All of the statements above are correct.
e. None of the statements above is correct.
Firm organization Answer: c Diff: E
ii. Which of the following statements is most correct?
a. One of the advantages of the corporate form of organization is that there is no double taxation.
b. The partnership form of organization has easy transferability of ownership.
c. One of the disadvantages of the sole proprietorship form of organi-
zation is that there is unlimited liability.
d. Statements b and c are correct.
e. None of the statements above is correct.
Firm organization Answer: a Diff: E
iii. Which of the following statements is most correct?
a. One advantage of forming a corporation is that you have limited
liability.
b. Corporations face fewer regulations than sole proprietorships.
Chapter 1 - Page 1
,c. One disadvantage of being a sole proprietor is that you have to pay
corporate taxes, even though you don’t realize the benefits of being a
corporation.
d. Statements b and c are correct.
e. None of the statements above is correct.
Chapter 1 - Page 2
,Firm organization Answer: a Diff: E
iv. Until this year, Cheers Inc. was organized as a partnership. This year,
the partners have decided to organize the business as a corporation. As
a result of this change in organizational form, which of the following
statements is most correct?
a. Cheers’ shareholders (the ex-partners) will now have limited liability.
b. Cheers will now be subject to fewer regulations.
c. Cheers will now pay less in taxes.
d. Cheers’ investors will now find it more difficult to transfer ownership.
e. Cheers will now find it more difficult to raise additional capital.
Firm organization Answer: c Diff: E N
v. Which of the following statements is most correct?
a. Corporations generally face fewer regulations than sole proprietor-
ships do.
b. Corporate shareholders have unlimited liability.
c. It is usually easier to transfer ownership in a corporation than it is
to transfer ownership in a sole proprietorship.
d. All of the above statements are correct.
e. None of the above statements is correct.
Corporate form Answer: c Diff: E
vi. Which of the following could explain why a business might choose to organize
as a corporation rather than as a sole proprietorship or a partnership?
a. Corporations generally face fewer regulations.
b. Corporations generally face lower taxes.
c. Corporations generally find it easier to raise capital.
d. Corporations enjoy unlimited liability.
e. Statements c and d are correct.
Corporate form Answer: a Diff: E
vii. Which of the following statements is most correct?
a. One drawback of forming a corporation is that it subjects the firm to additional regulations.
b. One drawback of forming a corporation is that it subjects the firm to limited liability.
c. One drawback of forming a corporation is that it makes it more difficult for the firm to raise
capital.
d. All of the statements above are correct.
Chapter 1 - Page 3
, e. Statements b and c are correct.
Chapter 1 - Page 4
