CHAPTER 1—AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL

ENVIRONMENT

Cengage Learning Testing, Powered by Cognero Page 1

1. The form of organization for a business is not an important issue, as this decision has very little effect on the income

and wealth of the firm's owners.

a. True

b. False

ANSWER: False

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: INTE.GENE.16.1 - LO: 1-2

NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking

STATE STANDARDS: United States - AK - DISC: Goals of the firm, role of - DISC: Goals of the firm, role of

finance, and analysis of public information

LOCAL STANDARDS: United States - OH - Default City - TBA

TOPICS: Firm organization

KEYWORDS: Bloom’s: Knowledge

2. The major advantage of a regular partnership or a corporation as a form of business organization is the fact that both

offer their owners limited liability, whereas proprietorships do not.

a. True

b. False

ANSWER: False

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: INTE.GENE.16.1 - LO: 1-2

NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking

STATE STANDARDS: United States - AK - DISC: Goals of the firm, role of - DISC: Goals of the firm, role of

finance, and analysis of public information

LOCAL STANDARDS: United States - OH - Default City - TBA

TOPICS: Firm organization

KEYWORDS: Bloom’s: Knowledge

3. There are three primary disadvantages of a regular partnership: (1) unlimited liability, (2) limited life of the

organization, and (3) difficulty of transferring ownership. These combine to make it difficult for partnerships to attract

large amounts of capital and thus to grow to a very large size.

a. True

b. False

ANSWER: True

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: INTE.GENE.16.1 - LO: 1-2

NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking

STATE STANDARDS: United States - AK - DISC: Goals of the firm, role of - DISC: Goals of the firm, role of

finance, and analysis of public information

LOCAL STANDARDS: United States - OH - Default City - TBA

TOPICS: Partnership

CHAPTER 1—AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL

ENVIRONMENT

Cengage Learning Testing, Powered by Cognero Page 2

KEYWORDS: Bloom’s: Knowledge

4. Two disadvantages of a proprietorship are (1) the relative difficulty of raising new capital and (2) the owner's unlimited

personal liability for the business' debts.

a. True

b. False

ANSWER: True

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: INTE.GENE.16.1 - LO: 1-2

NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking

STATE STANDARDS: United States - AK - DISC: Goals of the firm, role of - DISC: Goals of the firm, role of

finance, and analysis of public information

LOCAL STANDARDS: United States - OH - Default City - TBA

TOPICS: Proprietorship

KEYWORDS: Bloom’s: Knowledge

5. One key value of limited liability is that it lowers owners' risks and thereby enhances a firm's value.

a. True

b. False

ANSWER: True

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: INTE.GENE.16.1 - LO: 1-2

NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking

STATE STANDARDS: United States - AK - DISC: Goals of the firm, role of - DISC: Goals of the firm, role of

finance, and analysis of public information

LOCAL STANDARDS: United States - OH - Default City - TBA

TOPICS: Limited liability

KEYWORDS: Bloom’s: Knowledge

6. If a firm's goal is to maximize its earnings per share, this is the best way to maximize the price of the common stock

and thus shareholders' wealth.

a. True

b. False

ANSWER: False

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: INTE.GENE.16.2 - LO: 1-3

NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking

STATE STANDARDS: United States - AK - DISC: Goals of the firm, role of - DISC: Goals of the firm, role of

finance, and analysis of public information

LOCAL STANDARDS: United States - OH - Default City - TBA

TOPICS: Value maximization

CHAPTER 1—AN OVERVIEW OF FINANCIAL MANAGEMENT AND THE FINANCIAL

ENVIRONMENT

Cengage Learning Testing, Powered by Cognero Page 3

KEYWORDS: Bloom’s: Knowledge

7. If Firm A's business is to obtain savings from individuals and then invest them in financial assets issued by other firms

or individuals, Firm A is a financial intermediary.

a. True

b. False

ANSWER: True

POINTS: 1

DIFFICULTY: Difficulty: Easy

LEARNING OBJECTIVES: INTE.GENE.16.3 - LO: 1-4

NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking

STATE STANDARDS: United States - AK - DISC: Goals of the firm, role of - DISC: Goals of the firm, role of

finance, and analysis of public information

LOCAL STANDARDS: United States - OH - Default City - TBA

TOPICS: Financial intermediaries

KEYWORDS: Bloom’s: Knowledge

8. The disadvantages associated with a proprietorship are similar to those under a partnership. One exception relates to the

more formal nature of the partnership agreement and the commitment of all partners' personal assets. As a result,

partnerships do not have difficulty raising large amounts of capital.

a. True

b. False

ANSWER: False

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: INTE.GENE.16.1 - LO: 1-2

NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking

STATE STANDARDS: United States - AK - DISC: Goals of the firm, role of - DISC: Goals of the firm, role of

finance, and analysis of public information

LOCAL STANDARDS: United States - OH - Default City - TBA

TOPICS: Partnership

KEYWORDS: Bloom’s: Comprehension

9. The facts that a proprietorship, as a business, pays no corporate income tax, and that it is easily and inexpensively

formed, are two key advantages to that form of business.

a. True

b. False

ANSWER: True

POINTS: 1

DIFFICULTY: Difficulty: Moderate

LEARNING OBJECTIVES: INTE.GENE.16.1 - LO: 1-2

NATIONAL STANDARDS: United States - BUSPROG: Reflective Thinking

STATE STANDARDS: United States - AK - DISC: Goals of the firm, role of - DISC: Goals of the firm, role of

finance, and analysis of public information