Question 1

The class or type of stock that every corporation must have is preferred stock.

Accepted Answer

All corporations must have common stock.

Question 2

Preferred stockholders generally have no voting rights in a corporation.

Accepted Answer

While preferred stockholders have some preferential treatment over common stockholders, they have no voting rights.

Question 3

Ease of transferability of ownership is one of the important advantages of the corporate form of business organization.

Accepted Answer

Stockholders can sell their stock to others without disturbing the organization structure of the corporation.

Question 4

The balance sheet of a sole proprietorship will report two equity accounts: one for amounts contributed by the owner, and one for the business's earnings.

Accepted Answer

There is only one equity account in a sole proprietorship, the capital of the owner. Earnings and contributions increase this account and withdrawals decrease it.

Question 5

In a closely held corporation, exchanges of stock are limited to transactions between individuals.

Accepted Answer

Stock in a closely held corporation can only be held by individuals, and it does not trade on a stock exchange.

Question 6

Preferred stockholders' claims to a corporation's assets take precedence over the claims of some creditors.

Accepted Answer

Preferred stockholders' claims take precedence over the claims of common stockholders, but not over those of creditors.

Question 7

A separate capital account would be maintained for each partner in a partnership.

Accepted Answer

The capital account indicates the ownership interest of each partner.

Question 8

The book value of a share of stock is equal to the market or selling price of the stock.

Accepted Answer

The book value of a share of stock is calculated as total stockholders' equity divided by number of shares outstanding.

Question 9

A partner is responsible for his/her own actions and also for actions taken by another partner on behalf of the partnership.

Accepted Answer

This is known as joint and several liability, and it is a disadvantage of partnerships.

Question 10

Establishing a sole proprietorship generally requires the owner to get a charter from the state government.

Accepted Answer

Sole proprietorships do not require registration with state government.

Question 11

A distribution by a sole proprietorship to the owner is called a dividend.

Accepted Answer

Dividends are distributions to stockholders of corporations, not to the owners of sole proprietorships.

Question 12

Proprietorships are not separate legal entities; their earnings are taxable to the owners and not to the business itself.

Accepted Answer

Partners, not the partnerships themselves, pay taxes on the earnings of partnerships.

Question 13

All corporations are subject to extensive government regulation.

Accepted Answer

The extent of government regulation depends on the size and distribution of ownership interests of the corporation.

Question 14

Articles of incorporation, prepared by a business that wishes to incorporate, normally include the corporation's name and purpose, its location, and provisions for capital stock.

Accepted Answer

The articles also include the names and addresses of the corporation's first board of directors.

Question 15

The number of shares of stock outstanding generally is greater than the number of shares of stock issued.

Accepted Answer

The number of shares issued is normally equal to or greater than the number of shares outstanding.

Question 16

A benefit of corporations is that they are free from double taxation.

Accepted Answer

Double taxation is a disadvantage of corporations.

Question 17

The Securities and Exchange Commission was established in response to the accounting scandals that occurred in 2001 and 2002.

Accepted Answer

The Securities and Exchange Commission was established in response to the stock market crash of 1929. The PCAOB was established in response to the accounting scandals of 2001 and 2002.

Question 18

The stock market crash in 1929 led to the beginning of extensive regulation of corporations.

Accepted Answer

The 1929 stock market crash led to the Securities Act of 1933 and the Securities Exchange Act of 1934.

Question 19

A corporation is a legal entity created by the authority of a state government, separate and distinct from its owners.

Accepted Answer

A corporation is a separate legal entity from its owners, while a sole proprietorship is not. It must be registered with the state government.

Question 20

Liability is a significant disadvantage of the partnership form of business organization.

Accepted Answer

Partners in a general partnership are personally liable for the torts of the partnership.

Quiz 11: Proprietorships, Partnerships, and Corporations