CHAPTER 1 SOLUTIONS TO END OF CHAPTER MATERIAL QUESTIONS 1. The three general types of business are typically categorized as follows: service, manufacturing and merchandising. Service example: airline company, e.g. Southwest Manufacturing example: steel manufacturing company, e.g. US Steel Merchandising example: wholesaler company, e.g. Costco 2. The three common forms of business organizations are sole proprietorships, partnerships and corporations. The major differences between these forms of business organizations are in terms of ownership, liability and taxation. A sole proprietorship is owned by a single individual, who has unlimited liability; profits of the proprietorship flow through to the owner, who individually pays taxes on those profits. A partnership is owned by two or more individuals, who each have unlimited liability. Profits of the business flow through to the partners, who individually pay taxes on their specific share of those profits. A corporation is owned by stockholders; liability for organizational debts is limited to the amount of funds invested by owners, who cannot be held individually responsible for the debts. A corporation files a tax return and pays taxes. (Stockholders receiving dividends from a corporation commonly must pay taxes on those dividends…even though the corporation paid taxes on the profits from which the dividends are paid. Thus, it is said that corporate profits are effectively taxed twice: once upon being earned and once upon being distributed.) The most common form of business in the United States is the sole proprietorship. 3. The primary function of a business’s accounting function is to provide quantitative information, primarily financial in nature, about economic entities. The information is intended to be useful in making economic decisions for internal and external users of the information.