1. (TCO A) Which of the following statements is CORRECT? (Points : 10) It is generally more expensive to form a proprietorship than a corporation because, with a proprietorship, extensive legal documents are required. Corporations face fewer regulations than sole proprietorships. One disadvantage of operating a business as a sole proprietorship is that the firm is subject to double taxation, at both the firm level and the owner level. One advantage of forming a corporation is that equity investors are usually exposed to less liability than in a regular partnership. If a regular partnership goes bankrupt, each partner is exposed to liabilities only up to the amount of his or her investment in the business.

2. (TCO G) Which of the following statements is CORRECT? (Points : 10) The statement of cash flows reflects cash flows from operations, but it does not reflect the effects of buying or selling fixed assets. The statement of cash flows shows where the firm’s cash is located; indeed, it provides a listing of all banks and brokerage houses where cash is on deposit. The statement of cash flows reflects cash flows from continuing operations, but it does not reflect the effects of changes in working capital. The statement of cash flows reflects cash flows from operations and from borrowings, but it does not reflect cash obtained by selling new common stock. The statement of cash flows shows how much the firm’s cash—the total of currency, bank deposits, and short-term liquid securities (or cash equivalents)—increased or decreased during a given year.

3. (TCO G) An investor is considering starting a new business. The company would require $475,000 of assets, and it would be financed entirely with common stock. The investor will go forward only if she thinks the firm can