Economics Chapter 3 Test Flashcards

Questions and Answers

What is a sole proprietorship?

A business owned and run by a single person who has the rights to all profits and unlimited liability for all debts of the firm.

What is unlimited liability?

Requirement that an owner is personally and fully responsible for all losses and debts of the business.

What is inventory?

Stock of finished goods and parts held in reserve.

What is a partnership?

An unincorporated business owned and operated by two or more people who share the profits and responsibility for debts. Signup and view all the answers

What is a general partnership?

A form of partnership where all partners are equally responsible for management and debts. Signup and view all the answers

What is a limited partnership?

A form of partnership where one or more partners are not active in the daily running of the business and have limited responsibility. Signup and view all the answers

What is a corporation?

A form of business organization recognized by law as a separate legal entity. Signup and view all the answers

What is a charter?

Written government approval to establish a corporation. Signup and view all the answers

What is stock?

A certificate of ownership in a corporation. Signup and view all the answers

Who are stockholders or shareholders?

People who own a share or shares of stock in a corporation. Signup and view all the answers

What is a dividend?

A check that transfers a portion of the company profits to stockholders, usually quarterly. Signup and view all the answers

What is common stock?

The most frequently used form of corporate ownership, with one vote per share for stockholders. Signup and view all the answers

What is preferred stock?

A form of corporate ownership without vote, in which stockholders get their investments back before common stockholders. Signup and view all the answers

What is a bond?

A formal contract to repay borrowed money with interest. Signup and view all the answers

What is principal?

The amount borrowed when getting a loan or issuing a bond. Signup and view all the answers

What is interest?

Payment made for the use of borrowed money. Signup and view all the answers

What is double taxation?

Taxation of dividends both as corporate profit and as personal income. Signup and view all the answers

What is a merger?

Combination of two or more businesses to form a single firm. Signup and view all the answers

What is an income statement?

A report showing a firm's sales, expenses, net income, and cash flows for a certain period, usually three months or a year. Signup and view all the answers

What is net income?

A common measure of business profits determined by subtracting all expenses, including taxes, from revenues. Signup and view all the answers

What is depreciation?

Gradual wear on capital goods. Signup and view all the answers

What is cash flow?

The total amount of new funds a business generates from operations. Signup and view all the answers

What is a horizontal merger?

Combination of two or more firms producing the same kind of product. Signup and view all the answers

What is a vertical merger?

Combination of firms involved in different stages of manufacturing or marketing. Signup and view all the answers

What is a conglomerate?

A firm with four or more businesses making unrelated products, with no single business responsible for a majority of its sales. Signup and view all the answers

What is a multinational?

A corporation producing and selling without regard to national boundaries and whose business activities are located in several different countries. Signup and view all the answers

What is a nonprofit organization?

An economic organization that operates like a business but does not seek financial gain. Signup and view all the answers

What is a cooperative or co-op?

A nonprofit association performing some kind of economic activity for the benefit of its members. Signup and view all the answers

What is a credit union?

A nonprofit service cooperative that accepts deposits, makes loans, and provides other financial services. Signup and view all the answers

What is a labor union?

An organization that works for its members' interests concerning pay, working conditions, and benefits. Signup and view all the answers

What is collective bargaining?

Negotiation between union and company representatives over pay, benefits, and other job-related matters. Signup and view all the answers

What is a professional association?

A nonprofit organization of professional or specialized workers seeking to improve working conditions, skill levels, and public perception of its profession. Signup and view all the answers

What is a chamber of commerce?

A nonprofit organization of local businesses formed to promote their interests. Signup and view all the answers

What is the better business bureau?

A business-sponsored nonprofit organization providing information on local companies to consumers. Signup and view all the answers

What is a public utility?

A company providing an essential service such as water or electricity to consumers. Signup and view all the answers

What are the three types of business organizations?

Proprietorship, partnership, and corporation. Signup and view all the answers

How is a sole proprietorship formed?

With business licenses and fees. Signup and view all the answers

A sole proprietorship is easy to start up.

True Signup and view all the answers

In a sole proprietorship, management is simple.

True Signup and view all the answers

In a proprietorship, with profits of successful management, the owner does not have to share the profits with other owners.

True Signup and view all the answers

The proprietorship does not have to pay separate business income taxes.

True Signup and view all the answers

What type of satisfaction do many people get from being their own boss?

Psychological satisfaction. Signup and view all the answers

It is easy to get out of business.

True Signup and view all the answers

What is limited life?

A situation in which a firm ceases to exist when an owner dies, quits, or sells the business. Signup and view all the answers

The main disadvantage of proprietorship is that the owner of the business has unlimited liability.

True Signup and view all the answers

In a proprietorship, it is easy to raise financial capital.

False Signup and view all the answers

The size and efficiency of a proprietorship is a disadvantage.

True Signup and view all the answers

The proprietor often has limited managerial experience.

True Signup and view all the answers

It is difficult to attract qualified employees.

True Signup and view all the answers

The sole proprietorship is limited life.

True Signup and view all the answers

What is a partnership?

A business jointly owned by two or more persons. Signup and view all the answers

What are two types of a partnership?

General partnership and limited partnership. Signup and view all the answers

How is a partnership formed?

When articles of partnership are drawn up. Signup and view all the answers

Partnerships can usually attract financial capital more easily than proprietorships.

True Signup and view all the answers

There is a lack of special taxes on a partnership.

True Signup and view all the answers

In a partnership, management is easy.

False Signup and view all the answers

Partnerships are more efficient operations that come with their slightly larger size.

True Signup and view all the answers

Partnerships find it more difficult to attract top talent than proprietorships.

False Signup and view all the answers

A partnership is easy to start up.

True Signup and view all the answers

In general partnerships, each partner is fully responsible for the acts of all other partners.

True Signup and view all the answers

There is usually potential for conflict between partners.

True Signup and view all the answers

In the case of the limited partnership, a partner's responsibility for the debts of the business is limited by the size of his or her investment in the firm.

True Signup and view all the answers

A partnership does have limited life like a proprietorship.

True Signup and view all the answers

How is 90% of all business done in the United States?

Through corporations. Signup and view all the answers

How is a corporation formed?

By filing for permission from the national government or the state where the business will have its headquarters. Signup and view all the answers

What is the structure of a corporation?

Common stock or preferred stock. Signup and view all the answers

What are the strengths of a corporation?

<ol> <li>The ease of raising financial capital 2) Limited liability for its owners 3) Directors of the corporation can hire professional managers to run the firm 4) Corporation continues to exist when ownership changes.</li> </ol> Signup and view all the answers

What are the weaknesses of a corporation?

<ol> <li>Double taxation of corporate profits 2) Difficulty and expense of getting a charter 3) Owners/shareholders have little voice in how the business is run 4) Subject to more government regulation.</li> </ol> Signup and view all the answers

How do stockholders vote in corporate businesses?

One vote for each share of stock. The vote is used to elect a board of directors. Signup and view all the answers

How do common stockholders differ from preferred stockholders?

Common stockholders have the power to vote and elect members for the board of directors. However, preferred stockholders receive their dividends first. Signup and view all the answers

What two ways do businesses expand and grow?

Reinvestment and mergers. Signup and view all the answers

What is diversification?

When a firm has multiple businesses so if one type fails, the whole firm doesn't go down. Signup and view all the answers

How does a conglomerate differ from a multinational?

A multinational has its manufacturing and service operations in different countries, while a conglomerate has at least four businesses not necessarily in different countries. Signup and view all the answers

What are the purposes of nonprofit organizations?

To promote the interests of others rather than financial gain for its owners. Signup and view all the answers

What are the direct and indirect roles of government within our economy?

Direct: To produce and distribute goods and services (police, education, etc.) to consumers. Indirect: To help the economy operate smoothly and efficiently, and help its citizens through services such as social security, veterans benefits, and financial aid to students. Signup and view all the answers

How do three kinds of cooperatives differ?

Consumer: buys goods in bulk for its members; Services: provides services rather than goods; Producer: helps members to promote/sell goods. Signup and view all the answers

Why do many people prefer to deal with credit unions rather than banks?

Credit unions are much more fair and less about profit for the institution. Signup and view all the answers

The main advantage of a corporation is the ease of raising financial capital.

True Signup and view all the answers

The corporation provides unlimited liability.

False Signup and view all the answers

The directors of a corporation can hire professional managers to run the firm.

True Signup and view all the answers

What is it called when the corporation continues to exist even when ownership changes?

Unlimited life. Signup and view all the answers

Transferring ownership of a corporation is easy.

True Signup and view all the answers

What kind of detailed records must a corporation keep so that it can pay taxes on its profits?

Sales and expenses. Signup and view all the answers

What features of obtaining a charter causes a disadvantage for the corporate structure?

The difficulty and expense of obtaining a charter. Signup and view all the answers

Who has little voice in how the business is run?

Owners or shareholders. Signup and view all the answers

What are corporations subjected more to?

Government regulation. Signup and view all the answers

Study Notes

Business Organizations

Sole Proprietorship: A business owned by a single person; owner retains all profits but faces unlimited liability for debts.
Partnership: An unincorporated business owned by two or more individuals sharing profits and responsibilities for debts.
Corporation: A legally separate entity from its owners, offering limited liability and more complex administrative structures.

Business Structures and Liabilities

Unlimited Liability: Owners are fully liable for business debts, exposing personal assets to risk.
Limited Liability: Protects owners’ personal assets; they are not personally liable for corporate debts.

Financial Instruments and Ownership

Stock: Represents ownership in a corporation, with stockholders having voting rights in corporate decisions.
Dividends: Payments made to shareholders from a corporation's profits, typically issued quarterly.
Common Stock vs. Preferred Stock: Common stock grants voting rights; preferred stock typically has a fixed dividend and no voting rights.

Organizational Types

General Partnership: All partners share management and liabilities equally.
Limited Partnership: At least one partner has limited liability and is not involved in daily management.

Mergers and Growth Strategies

Merger: The combination of two or more businesses into one entity.
Horizontal Merger: Merging firms produce similar products, enhancing market share.
Vertical Merger: Companies at different production stages join to streamline operations.
Conglomerate: Businesses producing unrelated products, reducing risks through diversification.

Financial Statements and Performance Metrics

Income Statement: A summary of revenue, expenses, and profitability over a defined period.
Net Income: A key measure of profitability after deducting all expenses from revenues.
Cash Flow: Reflects the total new funds generated from business operations.
Depreciation: The gradual reduction in value of tangible assets like equipment over time.

Other Organizational Forms

Nonprofit Organization: Operates like a business but aims to benefit society rather than generate profit.
Cooperative (Co-op): A non-profit association created to provide economic benefits to its members.
Credit Union: A member-owned financial cooperative providing better services than traditional banks.
Labor Union: Advocates for workers’ interests regarding pay, conditions, and benefits.

Advantages & Disadvantages

Corporation Strengths: Access to capital, limited liability, continuity despite ownership change, and professional management.
Corporation Weaknesses: Double taxation, regulatory challenges, and limited owner influence over management decisions.

Government and Economic Roles

Government Roles: Indirectly supports the economy through welfare services; directly provides essential services like education and law enforcement.

Additional Definitions

Collective Bargaining: Negotiations between management and labor unions about pay and conditions.
Chamber of Commerce: A local business organization promoting commercial interests.
Better Business Bureau: Offers consumer information about local companies, fostering trust and ethical business practices.

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Test your knowledge on key concepts from Economics Chapter 3 with these flashcards. Focus on definitions such as sole proprietorship, unlimited liability, and inventory. Ideal for students preparing for exams in economics.