Chapter 3 Ownership of Firms

Which of the following descriptions about a sole proprietor are CORRECT?

(1) A sole proprietor must be the owner of a firm.

(2) The return to a sole proprietor can be negative.

(3) A sole proprietor often manages the firm himself.

• (1) and (2) only

• (1) and (3) only

• (2) and (3) only

• (1), (2) and (3)

Compared to a sole proprietorship, a partnership

(1) allows partners to make more prompt decisions.

(2) can enjoy a wider source of capital.

(3) allows expertise to be shared among partners.

• (1) and (2) only

• (1) and (3) only

• (2) and (3) only

• (1), (2) and (3)

Joanne is planning to start a business. Which of the following is a possible reason for her to form a sole proprietorship instead of a partnership?

• She can enjoy limited liability.

• She can make decision more quickly.

• She can have a wider source of capital.

• She does not need to disclose the accounting information to the public.

If a sole proprietor joins with other proprietors to form a partnership, he or she may aim at

(1) enjoying limited liability.

(2) sharing his expertise with others.

(3) reducing his risk of losing money.

(4) having a wider source of capital for expansion.

• (1) and (3) only

• (1) and (4) only

• (2) and (3) only

• (2) and (4) only

Mary and Susan were the owners of a trading firm. The firm was heavily in debt, and it eventually went bankrupt. Since the assets of the firm could not cover all the debts, they needed to use their personal properties to repay the remaining debts. To what type of business ownership did their firm belong?

• a sole proprietorship

• a partnership

• a private limited company

• a public limited company

If a firm is a legal entity, it

• enjoys lasting continuity.

• has no upper limit on the number of owners.

• enjoys limited liability.

• may sue or be sued in its own name.

From the viewpoint of the existing shareholders of a limited company, which of the following is a possible advantage of issuing bonds over issuing shares?

• More capital can be raised from issuing bonds.

• The controlling power of existing shareholders will not be diluted.

• The risk of bankruptcy can be lowered.

• The cost of raising capital can be lowered.

Derek was one of the owners of a company. He is not directly involved in its management and he can transfer his ownership freely without the consent of other owners. According to the above information, Derek’s company is an example of a

• sole proprietorship.

• partnership.

• private limited company.

• public limited company.

Mr. Chan was one of the shareholders of a firm. The firm cannot be listed on the stock exchange. Recently the firm has gone bankrupt due to a heavy debt. According to the above information, which of the following statements is CORRECT?

• Mr. Chan has to use his personal properties to settle the firm’s outstanding debt.

• There is no upper limit on the firm’s number of owners.

• Mr. Chan needs to have the consent of other shareholders before transferring his shares to others.

• The firm has to dissolve if Mr. Chan dies.

If an investor decides to buy bonds rather than shares of a company, he probably hopes to

• have a high return when the company earns huge profits.

• have a right to appoint the board of directors.

• gain control over the company.

• have a more steady return.