A Sole Proprietorship

1. Which of the following is true about a sole proprietorship?

Income from a sole proprietorship is distributed to the owner in the form of a dividend.

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A sole proprietorship is a company owned by two or more individuals.

The income from a sole proprietorship is taxed on the owner’s personal income tax return.

The owner’s liability is limited to the amounts invested in the business.


2. Corporations are ________.

for-profit businesses only

exempt from legal liability

owned by shareholders

manufacturers and not service organizations


3. Disadvantages of the corporate form of business organization include ________.

separation of ownership and management

limited liability for shareholders

double taxation

two or more of these


4. A manufacturing business ________.

provides services to its customers

buys goods for resale

makes the products it sells

will lend money to customers


5. Team Shirts, Inc. pays $5,000 cash for T-shirts from a supplier. This transaction ________.

causes an increase in total assets

is a financing activity

is an investing activity

is an operating activity


6. Revenues include ________.

the amount received from borrowing

the amount earned from providing goods to customers

the amount earned from providing services to customers

two or more of these


7. Team Shirts, Inc. pays $600 for insurance. This transaction ________.

causes total liabilities to increase and retained earnings to decrease

is an operating activity

is an investing activity

causes total assets to increase and total liabilities to increase


8. The statement of cash flows ________.

shows the changes that took place in the amount of shareholders’ equity during a period

is a list of all the cash collected and cash paid during a period

is a summary of all of the revenues minus all of the expenses for an accounting period

describes the financial situation of a company at a specific point in time


9. Wok N Roll, Inc. shows $300,000 of assets and $60,000 of shareholders’ equity on its balance sheet. Liabilities must equal ________.






10. Team Shirts, Inc. repays a $2,000 loan. This transaction ________.

causes total liabilities to decrease

causes total assets to increase

causes total shareholders’ equity to increase

is an investing activity


11. On March 1, Team Shirts had a beginning balance in retained earnings of $1,200. During March, Team Shirts paid $200 in dividends and had net income of $2,000. The March 31 balance in retained earnings was ________.






12. Dividends are ________.

the same as expenses

owners’ contributions to the firm

a reduction in retained earnings

another term for each partner’s share of partnership income


13. Comparative balance sheets ________.

include gross profit and operating income

report revenues for both the current and previous years

report financial ratios for the current year which are compared to the prior year’s

include balances of two consecutive years


14. Financial services companies ________.

deal in services related to money

lend money to consumers to pay for cars and houses

sell insurance to their customers

All of these are correct.


15. The owners of a corporation are called ________.




two or more of these


16. Which of the following is true about a corporation?

Each individual shareholder has individual legal responsibility for the corporation’s actions.

Managers of corporations can be held responsible for the actions of the corporation.

Corporations are exempt from taxes; however, the shareholders are required to pay taxes on dividends received.

Corporations must have a minimum of two or more shareholders.


17. The stock market is ________.

where the IRS is located

located in New York City

the general term used to refer to all stock exchanges

where businesses become incorporated


18. A business form in which the partners are not personally liable for the malpractice of any of the other partners is called a ________.


modified sole proprietorship

limited liability partnership



19. Dell Inc.’s distribution of earnings to owners is called dividends. Dell must be a ________.

sole proprietorship


sole proprietorship or partnership



20. For which organization are the personal assets of the owners at risk?


sole proprietorship and partnership


sole proprietorship

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