Chapter 3

Question 1

Sole Proprietorship

Answer 1

a business owned and run by one person

Question 2

Forming a Proprietorship

Answer 2

no requirements except for occasional business, licenses, and fees

Question 3

Advantages of a Proprietorship (6)

Answer 3

• ease of starting up
• ease of management
• owner enjoys the profits without having to share them with other owners
• doesn’t have to pay separate business income taxes
• psychological satisfaction
• ease of getting out of business

Question 4

Disadvantages of a Proprietorship (6)

Answer 4

• unlimited liability
• difficult to raise financial capital
• small size and efficiency
• limited managerial experience
• difficult to attract qualified employees
• limited life

Question 5

unlimited liability

Answer 5

the owner is personally and fully responsible for all loses and debts of the business

Question 6

inventory

Answer 6

a stock of finished goods and parts in reserve

Question 7

limited life

Answer 7

the firm legally ceases to exist when the owner dies, quits, or sells the business

Question 8

General Partnership

Answer 8

all partners are responsible for the management and financial obligations of the business

Question 9

Limited Partnership

Answer 9

at least one partner isn’t active in the daily running of the business

Question 10

Advantages of a Partnership (6)

Answer 10

• ease of establishment
• ease of management
• lack of special taxes on a partnership
• attract financial capital more easily than proprietorships
• larger than proprietorships
• attract top talent into their organizations

Question 11

Disadvantages of a Partnership (4)

Answer 11

• each partner is fully responsible for the acts of all other partners
• potential for conflict between partners
• limited partnership
• bankrupcy

Question 12

limited partnership

Answer 12

investor’s responsibility for the debts of the business is limited by the size of his or her investment in the firm

Question 13

bankruptcy

Answer 13

a court granted permission to an individual or business to cease or delay debt payments

Question 14

Corporation

Answer 14

a form of business organization recognized by law as a separate legal entity having all the rights of an individual

Question 15

charter

Answer 15

a government document that gives permission to create a corporation

Question 16

stock

Answer 16

ownership certificates in the firm

Question 17

dividend

Answer 17

a check representing a portion of the corporate earnings

Question 18

common stock

Answer 18

basic ownership of a corporation

Question 19

preferred stock

Answer 19

nonvoting ownership shares of the corporation

Question 20

Advantages of a Corporation (5)

Answer 20

• ease of raising financial capital
• directors of the corporation can hire professional managers to run the firm
• limited liability for owners
• unlimited life
• ease of transferring ownership

Question 21

bond

Answer 21

written promise to repay the amount borrowed at a later date

Question 22

prinicipal

Answer 22

amount borrowed

Question 23

interest

Answer 23

price paid for the use of another’s money

Question 24

Disadvantages of a Corporation (4)

Answer 24

• difficult to get a charter
• the owners/shareholders have little say in how the business is run after they have voted for the board of directors
• double taxation
• subject to more government regulation

Question 25

double taxation

Answer 25

stockholders’ dividends are taxed twice - once as a corporate profit and again as personal income

Question 26

a merger

Answer 26

a combo of 2+ businesses to form a single firm

Question 27

Income Statement

Answer 27

a report showing a business’ sales, expenses, and profits for a certain period

Question 28

net income

Answer 28

difference of all expenses, including taxes, from its revenues

Question 29

depreciation

Answer 29

a non cash charge the firm takes for the general wear and tear on its capital goods

Question 30

cash flow

Answer 30

total amount of new funds the business generates from operations

Question 31

Reasons for Merging (5)

Answer 31

• businesses aren’t growing at the rate they want with the internal funds
• efficiency
• need to acquire new product lines
• catch up or eliminate rivals
• lose corporate identity

Question 32

horizontal merger

Answer 32

2+ firms produce the same kind of product join forces

Question 33

vertical merger

Answer 33

firms involved in different steps of manufacturing join together

Question 34

a conglomerate

Answer 34

a firm that has at least 4 businesses, each making unrelated products, none of which is responsible for a majority of its sales

Question 35

a multinational

Answer 35

a corporation that has manufacturing or service operations in a number of different countries