Chapters 5 THRU 8 For Study

CHAPTER 5
5-1. The corporation is the most common form of business ownership.

Answer: False LG: 1/LL: 1 Page: 142
5-2. The three major forms of business ownership in the U.S. are sole proprietorships,
partnerships, and corporations.
Answer: True LG: 1/LL: 1 Page: 142
5-4. Once a business is established, it's almost impossible to change from one form
of business ownership to another.
5-5. A comparison of the three major forms of business ownership shows that sole
proprietorships are usually the most difficult type of business to establish.
5-6. The first step in starting a sole proprietorship is to fill out a proprietorship charter
application form and file it with the state government.
5-8. The profits of a sole proprietorship are taxed as the personal income of the
owner.
5-10. A major advantage of sole proprietorships is that an owner has limited liability for
the debts of his or her business.
5-12. The debts of a business operated as a sole proprietorship are considered to be
the personal debts of the owner of the business.
Answer: True LG: 1/LL: 1 Page: 143-144
5-13. A drawback of sole proprietorships is that they usually have limited access to
additional financial resources.
5-14. An advantage of forming a sole proprietorship is that it allows the owner to have
more time for leisure activities.
5-15. Jim wants to start a business. He is attracted by the idea of being his own boss,
and wants to get started with a minimum of expense and hassle. He is very
confident in his abilities, so he is not particularly worried about financial risks. All
of these factors suggest that Jim would favor starting his business as a sole
proprietorship.
Rationale: People who want to be their own boss often prefer to operate their
business, at least initially, as a sole proprietorship. Another advantage of the sole
proprietorship is that it is a relatively easy and inexpensive form of business to
set up. One drawback of a sole proprietorship is that the owner has unlimited
liability. However, Jim is not worried about risk, so this would not appear to be a
major problem for him.
5-16. If a sole proprietorship fails, the owner may lose whatever was invested in the
business, but the owner's personal assets are not at risk.
Answer: False LG: 1/LL: 2 Page: 143-144
Rationale: Sole proprietors have unlimited liability for the debts of their business.
This means that if their business gets into financial trouble they can lose their
personal assets.
5-19. A general partner can take an active role in the management of the business.
5-20. All of the partners in a general partnership have limited liability for the debts of
their firm.
5-21. In a general partnership, all owners share in both management of the business
and in the assumption of liability for the firm's debts.
5-24. A limited partner is an owner who takes no management responsibility and has
no liability for losses beyond the amount invested.
5-27. According to the Uniform Partnership Act, the three key elements of any general
partnership are (1) shares of stock to represent ownership, (2) limited liability,
and (3) ease of ownership transfer.
5-28. A recent study showed that partnerships are more likely to fail than sole
proprietorships.
5-29. A major objective of limited liability partnerships (LLPs) is to limit each partner's
personal liability to the consequences of their own acts and those of people
under their supervision.
5-32. In order to protect all parties and minimize misunderstandings among partners,
all terms of the partnership should be spelled out in writing.
5-33. One advantage of a partnership is that there is a simple process for partners to
terminate their business.
5-34. Compared to sole proprietorships, an advantage of partnerships is their ability to
obtain more financial resources.
5-36. Compared to sole proprietorships, partnerships offer the advantage of shared
management and pooled knowledge.
5-37. A limited partnership refers to a partnership set up for a temporary purpose, such
as a real estate development project.
5-38. Ted and Mark have been partners in a dry cleaning business for the past three
years. They would like their brother Todd to join them. Unfortunately, partnership
law states that only two partners can participate in a partnership.
Rationale: A partnership consists of two or more owners.
5-40. Sharon Pebble and Gilbert Stone have just formed a business partnership. Under
their arrangement, Sharon will actively manage the company and assume
unlimited liability for the firm's debts. Gilbert will invest several thousand dollars
of his money and will share in the profits, but will not actively manage the firm
and will not have liability for losses beyond his initial investment. Sharon and
Gilbert have formed a limited partnership.
Rationale: A limited partnership consists of at least one general partner, who has
unlimited liability, and at least one limited partner, who can lose only what he or
she has invested. The limited partner cannot actively manage the partnership.
5-41. Alphonzo has agreed to become a partner in his brother's new clothing store and
has provided 30 percent of the startup capital for Remoras Clothiers. Since he
provided 30 percent of the money to start the firm, he is legally entitled to 30
percent of any the profits the firm earns during its first year of operations.
Rationale: The division of profits in a partnership is negotiable and is not
necessarily tied to the amount of the initial investment.
5-42. Ron and Jon want to go into business together. They do not want to bring in other
partners, but they both want to avoid unlimited liability for any debts incurred by
their new company. Ron and Jon can achieve their aims by organizing the firm as
a limited partnership.
Rationale: All partnerships, including limited partnerships, must include at least
one general partner. The general partners in a limited partnership must accept
unlimited liability. Thus, if Ron and Jon form a limited partnership they will either
have to bring in another person to be the general partner, or one of them will
have to be the general partner and accept unlimited liability.
5-44. Connie is a general partner in a retail cookie store. Her personal assets are
protected from the debts of the business.
Rationale: As a general partner, Connie assumes unlimited liability for the debts
of her business.
5-45. A conventional corporation is a state-chartered legal entity, with authority to act
and have liability separate from its owners.
5-48. A corporation can raise financial capital by selling shares of stock to interested
investors.
5-49. Stockholders in a corporation must accept unlimited liability for the corporations
debts.
5-51. When one of the owners of a corporation dies, the corporation legally ceases to
exist.
5-52. Corporations are easy to start and easy to terminate.
5-53. A disadvantage of corporations is that they generally require extensive
paperwork.
5-56.
The stockholders in a corporation elect a board of directors to oversee the

companys major policy issues.
Answer: True LG: 3/LL: 1
Page: 150-151
5-57. Stockholders in a corporation have limited liability for the debts of the
corporation.
5-58. One advantage of corporations is that the initial cost of setting them up is usually
lower than for other forms of ownership.
5-61. One reason Individuals incorporate is to obtain the advantage of limited liability.
Page: 152
5-62. One advantage of an S Corporation is that the profits of the business are taxed
as regular personal income of the owners, thus avoiding the problem of double
taxation.
Page: 152-153
5.63.
Any corporation can qualify to be classified as an S corporation as long as it fills

out and files the proper paperwork with the appropriate state agency on an
annual basis.
Answer: False LG: 3/LL: 1
Page: 153
5-65. The advantages of limited liability companies are not available to providers of
personal services like doctors and lawyers.
5-68. A limited liability company is similar to an S corporation, but without the special
eligibility requirements.
5-69. Limited liability companies have both flexibility in tax treatment of earnings and
limited liability protection for owners.
5.71.Like stockholders of a C corporation, owners of a limited liability company (LLC)
are free to sell their ownership without the approval of other members.
Answer: False LG: 3/LL 1
Page: 154
5-72. Owners of limited liability companies (LLCs) must pay self-employment taxes on
any profits they earn.
Answer: True
LG: 3/LL: 1
Page: 154
5-74. Dr. Wright is interested in incorporating as an individual. While this is legally

possible, there are really no advantages to doing so.
Rationale: Many individuals choose to incorporate to obtain limited liability. In
some cases, they may also receive tax savings by doing so.
5-75. Nutty Dough is a small chain of donut shops that is currently owned and operated
by a group of seven partners. The owners think that their chain has the potential
for rapid growth, but several of the partners are concerned about the growing
financial risks that will accompany this growth. One way the partners could deal
with this problem would be to incorporate their business.
Rationale: Because they can issue shares of stock and bonds, and often find it
easier to obtain loans from financial institutions, corporations usually have easier
access to financial resources than unincorporated businesses. Another
advantage of corporations is that they provide their owners (stockholders) with

the protection of limited liability.
5.76. When Erica Wayne decided to start a business she chose to form it as a
corporation. This choice ensures that, as the founder and incorporator of the
company, Erica will remain in control of the firms operations as long as she
wants, no matter how large or complex the business becomes.
Rationale: One potential drawback of incorporation is the possibility of conflict
between the entrepreneurs who originally start a business and the stockholders
and board of directors who may eventually gain control. The text cites the cases
of Rod Canion of Compaq and Steve Jobs of Apple Computer as examples of
entrepreneurs who were forced out of the very companies they founded.
5-77. Mojo Motors is a rather small conventional corporation with only 212
stockholders. Eleven of the stockholders are citizens of Mexico who live in
Mexico City, and eight more are citizens of Canada who live in Toronto. Mojo
Motors should organize as an S corporation in order to save on taxes.
Rationale: Mojo Motors does not satisfy the requirements for an S corporation--it
has more than 75 stockholders, some of whom are not U.S. citizens or
permanent residents of the United States.
5-78. The partners at Edgar's Microbrewery would like to switch to an S corporation.
Unfortunately, their lawyer has told them that they do not meet some of the
requirements necessary to qualify as an S corporation. An alternative form of
business that would give them similar advantages is a limited liability company.
Rationale: Limited liability companies offer many of the same advantages as S
corporations, including limited liability and the possibility of taxation like a
partnership, without the special eligibility requirements required to qualify for S
corporation status.
5-79. The owners of the new Chillout Ice Cream Company have chosen to organize
their business as a limited liability company. One drawback of this form of
ownership is that the owners will pay higher taxes on their earnings than a
regular corporation if their company grows rapidly.
Rationale: In terms of taxes, a limited liability company offers the best of all
worlds, allowing the owners to choose to be taxed as a partnership or a
corporation depending on which tax rates would benefit them the most.
5-81. In a merger, two firms combine to form one company.

5-83. An acquisition is when one company buys the property and obligations of another
company.
5-86. In a conglomerate merger, firms in the same industry merge to expand their
share of the market.
5-88. A merger between two businesses in different stages of related businesses is
known as a vertical merger.
5-91. When a group of investors take a firm private, they obtain all of the stock for
themselves.
5-94. In the past, the Beirdergs Markets and Bronews Groceries have been fierce
competitors in the grocery market. However, they recently issued a joint
announcement stating their decision to merge. The announcement justified the
proposed merger by claiming that the resulting firm would have more financial
resources, which would enable it to expand services and broaden offerings to
consumers. This proposed merger is an example of a horizontal merger.
Rationale: A merger between two firms in the same industry, such as two grocery
store chains, is a horizontal merger.
5-96. A major objective of a leveraged buyout is to enable investors to gain control of a
company by issuing new shares of ownership, thus minimizing the use of debt.
Rationale: Leveraged buyouts involve financing the acquisition of an organization
through the use of debt financing.
5-97. Jane Gramm is leading a group of stockholders who want to take the Bigbux
Corporation private. If Jane's group succeeds, Bigbux's stock will no longer be
available to investors on the open market.
Rationale: Taking a firm private involves gaining control of a firm's stock so that it
is no longer available to investors on the open market.
5-98. The workers at Scrappys Metal Fabrication, Inc., have learned that the firm is
about to close down. They have devised a plan to use debt financing to buy the
company's stock from current shareholders with the intention of keeping the
company in business, thus saving their jobs. This strategy is called a leveraged
buyout.
Rationale: A leveraged buyout involves the use of debt financing to buy the stock
of a company. This is what the workers are attempting to do in this example.
5-100. A franchise agreement is an arrangement where a franchisor sells the rights to a
business name and to sell a product or service within a given territory to a
franchisee.
5-101. A franchise may be organized as a sole proprietorship, partnership, or
corporation.
5-105. In a franchise arrangement, ownership of all of the individual stores or outlets
remains in the hands of the franchisor.
5-106. One of the major advantages of a franchise system is the franchisee often gets
instant recognition from consumers.
5-107. Franchisees must follow more rules, regulations, and procedures than if they
operated independently owned businesses.
5-108. The coattail effect refers to the burden of corporate rules and regulations on
franchisees.
5-111. The franchisee often must pay the franchisor a share of profits or a percentage
commission on sales known as a royalty.
5-116. Franchising in global markets has demonstrated that high operating costs are
counterbalanced by high profit opportunities.
5-121. Les is a franchisee in the Far Horizons Travel Agency franchise. As a franchisee,
Les is guaranteed the right to retain all of his franchise's profits.
Rationale: Franchisees usually pay a royalty to the franchisor. This royalty is
sometimes expressed as a share of the franchisee's profits.
5-122. Leanne is a franchisee in a restaurant chain. Thanks mainly to her hard work and
people skills, her individual outlet is doing quite well. However, she has noticed
that several other franchisees in the same chain have let their businesses
deteriorate, especially in terms of the quality of the food they offer. Leanne
should be very concerned about this trend, since it eventually could affect her
own business.
Rationale: The actions of less successful franchisees can hurt the success of
others in the same franchise. This is known as the coattail effect.
5-125. A cooperative consists of people with similar needs who pool their resources for
mutual gain.
5-126. It is not unusual for members of cooperatives to work for and help manage their
cooperative.
5-127. Farm cooperatives were originally established to help farmers increase their
economic power by acting as a group rather than as individuals.
5-133. The ___________ is the most common form of business ownership.
A) partnership.
B) corporation.
C) joint venture.
D) sole proprietorship.
Answer: D LG: 1/LL: 1 Page: 142
5-134. A ___________ is a business organization that is owned, and usually managed,

by one person.
A) closed corporation.
B) subchapter S corporation.
C) sole proprietorship.
D) limited partnership.
Answer: C LG: 1/LL: 1 Page: 142
5-135. ____________ comprise about 20% of all businesses but account for about 87%
of all business receipts.
A) Corporations
B) Partnerships
C) Sole proprietorships
D) Limited liability companies
Answer: A LG: 1/LL: 1 Page: 142
5-142. Any debts or damages incurred by a firm organized as a sole proprietorship are:
A) the sole responsibility of the owner.
B) limited to the amount the owner has invested in the firm.
C) paid for out of a reserve contingency fund that sole proprietors are required
by law to set up.
D) normally covered by liability insurance.
Answer: A LG: 1/LL: 1 Page: 143-144
5-143. An entrepreneur who wishes to start a business with little delay or hassle, and
who wants to be his or her own boss, should organize the business as a:
A) sole proprietorship.
B) cooperative.
C) C corporation.
D) general partnership.
Rationale: Two advantages of sole proprietorships are ease of starting (and
ending) and being your own boss.
CHAPTER 6
TRUE/FALSE
6-1.Entrepreneurship involves accepting the risk of starting and running a business.
6-2.Entrepreneurship is another name for management.

6-3.Many business started by entrepreneurs have grown into major corporations
employing thousands of workers.
Answer: True LG: 1/LL: 1 Page: 174 -175
6-4.Entrepreneurs are motivated by the desire to earn a profit.
6-5.
Successful entrepreneurs accept the risk of failure.

6-6.
It is important for an entrepreneur to be highly energetic.

6-7.
Potential entrepreneurs would be well advised to surround themselves with

people who are smarter than they are.
Answer: True LG: 1/LL: 1 Page: 177, Figure 6.1
6-8.
Entrepreneurial teams combine the creative marketing and production ideas of a

group of experienced people. .
6-9.
Micropreneurs is a term used to describe entrepreneurs who focus on the

continued growth of their businesses.
6-10. The most important difference between entrepreneurs and micropreneurs is the
focus placed by micropreneurs on balancing the demands of work and family.
6-11.
Micropreneurs are motivated by a desire to have both a satisfying family life and
rewarding work.
6-12. Web-based businesses avoid the risk of failure faced by traditional startup
businesses.
6-13. An intrapreneur is the creative person who starts and manages a nonprofit
organization.
6-14. Creative people working as entrepreneurs within a large organization are called
intrapreneurs.
6-15. The U.S. government offers "investor visas" to attract more entrepreneurs.
6-16. Enterprise zones offer lower tax rates and government assistance to attract
private business investment.
6-17. Entrepreneurial teams increase the cooperation between marketing, production
and other functional areas of a business venture
Rationale: In entrepreneurial teams, all members work together to conceive,
make, and market a new product.
6-18. Kylie is employed by Street Wheels, a large corporation that produces
accessories for scooters, bicycles, and other children's vehicles. She is a
creative force within the company and has helped launch several new successful
products. Kylie is an example of an intrapreneur.
Rationale: Intrapreneurs are creative people who work within corporations to
launch new products and generate new profits.
6-19. The management of a nonprofit organization is much the same as the

management of small and large businesses.
6-20. Of all nonfarm businesses in the United States, almost 97 percent are considered
small by the Small Business Administration (SBA) standards.
6-21. Large firms have a greater ability to provide personalized, fast response
customer service than do small business organizations.
6-22. About 80 % of Americans find their first jobs in small businesses.
6-23. The number of women owning small businesses has grown slowly.
6-24. Many small businesses list the lack of qualified workers as one of their biggest
obstacles to growth.
6-25. Most business opportunities offer entrepreneurs high levels of security and
profits.
6-26. The easiest businesses to start also have the least growth potential and the
greatest failure rates.
6-27. While the first job for many people is working for a small business, most of the
permanent new jobs are created by larger corporations.
Rationale: Employment in large companies has been declining for many years.
Virtually all job growth is provided by small businesses.
6-28. Marina has just completed her business degree. Her best job search strategy
would be to concentrate on looking for work with a major corporation.
Rationale: Many large firms are downsizing, and virtually all job growth is
currently created by small businesses. If Maria focuses on job opportunities with
big firms, she is likely to limit her chances of finding employment.
6-29. Renee, a manager at a small manufacturing firm, has offered to help manage a
local branch of the YMCA. Unfortunately, Renee will find that the skills acquired
managing a small business will not be useful in managing a nonprofit
organization.
Rationale: The skills needed to manage small businesses, big businesses,
charities, churches, and government agencies are very similar.
6-30. A close look at the statistics indicates that the lack of qualified workers is a major
obstacle to the growth of successful small businesses.
Rationale: One quarter of the small businesses surveyed list the lack of qualified
workers as one of their biggest obstacles to growth.
6-31. Traditionally small business statistics classified the retirement of an owner of a
sole proprietorship as a business failure.
Rationale: Retirement and change of the legal form of business (i.e. partnership
to a corporation) have traditionally been classified as a business failure.
Economist Bruce Kirchhoff contends that these misinterpretations of the statistics
have greatly overstayed the business failure rate.
6-32. Small businesses lack the resources to compete directly with big businesses.
Rationale: Small businesses can often compete successfully against big
businesses because they are more nimble and able to offer more personalized
customer service.
6-33.Sharaf decided to work for a floral design shop before opening her own shop. She
will find that this was a waste of time as her work is used to make someone else
successful.
Rationale: Sharaf will gain valuable training and insights into the floral design
business by working for someone else. Her experience should reduce her risks
and help her operate more efficiently when she starts her own business.
6-34.The personal character of an entrepreneur is irrelevant to bankers when
determining the credit worthiness of business loan.
6-35.Software designed to help create business plans has proven to be of little value
because of the great variety in the types of businesses.
6-36.Potential suppliers can be an excellent source of financing for a new business since
lending money to a new customer may be very much in their own interest.
6-37.State and local governments often act as venture capitalists.
6-38.Venture capitalists provide funds for small businesses as part of their philanthropy
programs.
6-39.As a result of corporate downsizing, Margo lost her job as the director of human
resources at a major steel producer. However, she took this opportunity to
establish her own business providing temporary employees to area businesses.
Margo has likely found that:
A) going into business for yourself can quickly provide security and profits.
B) there aren't many women going into small business.
C) the service sector is not an area of significant growth.
D) successful big businesses often create profitable opportunities for small
businesses.
Rationale: As big businesses downsize, they often find that they do not always
have the staff they need and are increasingly contracting with small companies to
temporarily fill their needs through outsourcing. That's how it is in business. Big
businesses don't serve all the needs of the market. There is plenty of room for
small companies to make a profit filing those niches.
6-40.For prospective entrepreneurs, enrolling in an Introduction to Business or Small

Business Management course offered through their community college:
A) is likely to be wasted time since college courses tend to be too theoretical.
B) can be helpful by offering them an opportunity to meet experienced small
business owners.
C) would be most helpful after starting their business venture.
D) would offer training equivalent to two years of on-the-job experience.
Answer: B LG: 3/LL: 2 Page: 187
Rationale: One of the best things about small business courses offered by
community colleges is that they can bring together entrepreneurs. The advice
experienced entrepreneurs can share with those just getting started can be
invaluable.
6-41.Motivated by his desire to operate his own business, Caleb is considering the
purchase an existing business. As he carefully weights this option, he is likely to
find that:
A) very few owners of small businesses have any interest in selling.
B) his potential for success would greatly improve if he started his own new firm.
C) the value of an existing business is determined by what the business owns,
what it earns, and what makes it unique.
D) any entrepreneur willing to sell their business is experiencing serious
financial problems.
Rationale: The value of a firm is based on three things: what it owns, what it
earns, and what makes it unique.
6-42.The business plan of a new entrepreneur should include all of the following except:
A) target market.
B) capital required.
C) competitive advantages.
D) names of employees.
6-43.After personal savings, the next largest source of capital for entrepreneurs has
been from
A) large multinational banks.
B) the Small Business Administration.
C) state and local governments.
D) individual investors.
6-44.Which of the following government agencies is responsible for encouraging the

development of small business?
A) Small Business Administration.
B) Federal Trade Commission.
C) Entrepreneur Assistance Center.
D) Federal Microloan Authority.
6-45.Small business owners often struggle in attracting qualified workers. Which of the
following does not contribute to this problem? Small firms offer:
A) less attractive fringe benefits than offered by larger firms.
B) lower wages than paid by large corporations.
C) limited room for advancement.
D) a lack of challenging jobs.
6-46.A good business plan will:
A) focus on the big picture and omit the small details of operating the business.
B) describe all aspects of the business, including product, the target market, the
nature of the competition, and the owners resources and qualifications.
C) be purposefully vague, since specifics can restrict creativity and flexibility.
D) focus on the nature of the business and the target market, omitting personal
information about the owner in order to avoid personality issues.
Rationale: A business plan is a detailed written statement that describes the
nature of the business, the target market, the advantages the business will have
relative to competitors and the resources and qualifications of the owner.
6-47.When seeking financial backing from a venture capitalist, a small business owner
should realize that the venture capitalist will:
A) charge an interest rate that is much higher than any other lender.
B) not be interested in the management of the business.
C) expect an ownership stake in the company in exchange for the financial
backing.
D) demand that the money be repaid within 90 days or less.
Rationale: Venture capitalists often ask for a hefty ownership stake in a business
in exchange for the cash needed to get that business started.
6-48.A market consists of potential buyers of a good or service. However, for a market
to exist:
A) wholesalers and retailers are involved in the distribution of the product.
B) one firm must dominate in sales and product development.
C) people must have unsatisfied wants and needs as well as a willingness and
ability to buy.
D) the product must be laboratory tested and approved by the Federal Food and
Drug Administration (FDA).
Rationale: A market consists of people who have unsatisfied wants and both the
willingness and the resources necessary to buy the good or service.
6-49.Bubba, a licensed real estate broker, received notification that his application for a
business loan was denied. The bank refused his request because he failed to
provide a blueprint identifying the intended target market and competitive
strategy. In order secure a bank loan Bubba evidently needs a:
A) bankruptcy lawyer.
B) business plan.
C) venture capitalist.
D) loan advocate.
Rationale: A business plan provides a detailed written statement of the nature of
a firm, its target market, its competitive advantages, and the resources and
qualifications of its owner.
6-50.As a ________ Rick searches for firms in need of additional funding to achieve
their goals. In return for his investment, Rick becomes a part owner in the
business.. Rick operates as a(n):
A) investment analyst.
B) venture capitalist.
C) corporate raider.
D) securities trader.
Rationale: A venture capitalist is an individual or firm that provides startup capital
in exchange for a stake in the ownership of the business.
As a small business owner, Tanika can't afford to provide her employees with the high
wages and benefits offered by big corporations. One way to retain her employees and
create a high level of motivation would be to:
A) threaten to fire her existing employees and hire new workers.
B) adopt a policy of promoting the workers who have been employed the
longest.
C) empower her employees to develop their own ideas
D) hire only family members, since they are more loyal.
Rationale: Many small firms motivate workers by creating challenging jobs and
treating them respectfully.
6-51.One reason why many U.S. small businesses are not involved in exporting is:
A) there is a limited market for their products.
B) the governments new homeland security programs limit opportunities for
small businesses.
C) many of these firms do not know how to get started.
D) U.S. products are perceived as inferior.
6-52.Which of the following best describes the opportunities available to small
businesses in international markets?
A) The world is a much larger, and potentially more lucrative, market than the
U.S. domestic market.
B) The threat of terrorist activities prevents small businesses from competing
internationally.
C) Most foreign buyers prefer to deal with large, well-known corporations rather
than small businesses.
D) Higher business costs eliminate the profit opportunities in global markets.
Rationale: The U.S. has only about 5% of the world's population, and there is a
growing demand for American goods and services. The Commerce Department
reports that while only a small percentage of small businesses export, the
number of small businesses involved in exporting has tripled in the last decade.
Peppy is confident that Pizza Whirl will be a success, but only if he has enough
money to do things right. Since Peppy has very little personal wealth, he knows
he must obtain financial help. In order to be prepared for meetings with bankers
and potential investors, Peppy should:
A) hire a public relations firm to develop promotional materials.
B) develop a business plan.
C) read a book on entrepreneurship.
D) create a partnership contract.
Rationale: A business plan, which provides a detailed description of the new
business, is mandatory when meeting with bankers and investors.
CHAPTER 7
TRUE/FALSE
7-4.
Todays workers require a different managerial style than workers of previous

eras.
7-5.
The need to manage change has become increasingly important with the
emphasis on global challenges and opportunities.
7-6.
Although downsizing has reduced the number of nonmanagerial jobs, it actually

has increased the need for middle managers.
7-7.
Workers are becoming better educated and more self-directed.

7-8.
Management is the art of getting things done through organizational resources.

7-22. The four key management functions are planning, organizing, leading, and
controlling.
7-26.The management function that involves guiding, training, and motivating others to
work toward the achievement of an organizations goals is called leading.
Answer: True
LG: 2/LL: 1
Page: 214
7-27. Planning is the function of management that involves anticipating future trends
and determining the best strategies and tactics to achieve an organization's goals
and objectives.
7-29. Beth has spent the last two hours going over some consumer surveys to see how
well her company is achieving its goal of improving customer satisfaction. Beth's
efforts are an example of the controlling function of management.
Rationale: Controlling is the function concerned with determining whether or not
an organization is progressing toward achieving its goals and objectives.
7-32. Rita is a manager of a medium-sized service company. She is currently involved
in redesigning her department to ensure that employees and other resources can
respond more quickly and efficiently to the needs of its customers. Ritas efforts
are part of the organizing function of management.
Rationale: Organizing involves designing the structure of the organization so that
resources can efficiently achieve the organizations objectives. One of the key
objectives today is to find ways to organize businesses so that they please the
customer.
7-38. A vision is the overall explanation of why an organization exists and where it is
trying to head.
7-39. A mission statement outlines the fundamental purposes of an organization.
7-45. SWOT analysis helps firms identify both competitive threats and market
opportunities.
7-47. Tactical planning deals with setting long-range goals, while strategic planning
develops the specific strategies needed to achieve the organization's tactical
goals.
7-48. Strategic planning determines the major goals of the organization.
7-51.Contingency planning involves developing alternative courses of action to be used
if the primary plans do not achieve the desired results.
7-62. SWOT analysis focuses only on the internal activities of the firm, while other
analytical tools are used to review the external environment in which the firm
operates.
Rationale: SWOT stands for strengths, weaknesses, opportunities and threats.
While the strengths and weaknesses part of SWOT analysis focuses on internal
aspects of the organization, the opportunities and threats part of SWOT looks at
the external environment in which the organization operates.
7-72. An organizational chart shows who is accountable for the completion of specific
work and who reports to whom.
7-76. Supervisory managers are those who directly oversee the activities of workers
and evaluate their daily performance.
7-77. Middle managers usually are responsible for tactical planning and controlling.
7-78. The CIO, COO, and CFO are all management positions that would be classified
as being part of top management.
7-79. In this day of rapidly changing technology, technical skills are the most important
skills for all levels of management.
7-85. The purpose of a cross-functional team is to train the members of a single

department to perform the functions of other departments.
7-86. One result of the trend toward self-managed teams is that more planning,
organizing and controlling are being delegated to lower-level managers.
7.89.
Anyone who is affected by an organizations policies and products is considered

to be a stakeholder in that organization.
7-100. A key to having an effective staffing policy is to recruit people much like the
people already working at the firm.
7-126. The autocratic style of leadership can be very effective in emergency situations.
7-127. The traits used by autocratic leaders include warmth, friendliness, and
understanding.
7-128. The traits that characterize participative leaders include flexibility, good listening
skills, and empathy.
7-134. When businesses empower their employees, the role of a manager becomes
less that of a "boss" and more that of a coach, counselor, or team player.
7-156. In order to be effective, performance standards must be specific, attainable, and
measurable.
7-157. Accounting and finance are important for control systems because they provide
the numbers management needs to evaluate progress.
7-158. External customers are those individuals or units that receive services from other
units within the same organization.
7-160. A corporate scorecard is a broad measurement tool that indicates a company's
progress toward its final destination-profits.
7-175. According to well-known management consultant Peter Drucker, managers
provide:
A) a direction for their organization and leadership.
B) technical know-how and consistency.
C) scientific analysis of data and philosophical insights into fundamental
questions.
D) rules and regulations.
7-176. One of the four primary functions of management is:
A) controlling.
B) marketing.
C) financing.
D) designing.
7.185. As a manager, two of Sylvias strengths are her ability to communicate goals
clearly, and her ability to guide, coach, and motivate workers. Based on these
strengths, ________ is a management function that Sylvia is likely to be good at
performing.
A) controlling
B) planning
C) leading
D) organizing
Answer: C
LG: 2/LL: 2
Page: 214
Rationale: Leading involves communicating, guiding, training, coaching, and

motivating others to work effectively toward achieving an organizations goals.
7-186. Amanda, a regional manager for Flairol Cosmetics, has just seen a report
showing that sales in her region are lower than anticipated so far this quarter. Her
next task is to determine the reason for the disappointing results and find a way
to get sales up to their desired level. Amanda's efforts are part of the
____________ function of management.
A) controlling
B) directing
C) organizing
D) planning
Rationale: Controlling involves checking to determine whether goals and
objectives are being met, and taking corrective action if they are not.
7-188. Which of the following activities is part of the planning function of a manager?
A) Assigning a particular worker to do a specific task.
B) Looking at market forecasts to identify future business opportunities and
challenges.
C) Praising a sales representative who has far exceeded her monthly sales
objectives.
D) Conducting a job interview with a potential new employee.
Rationale: Planning involves anticipating trends, identifying opportunities and
challenges, and devising strategies and tactics that will help the firm achieve its
goals and objectives.
7-189. Which of the following activities is part of the organizing function of a manager?
A) Going over a spreadsheet to analyze some financial data.
B) Teaching a new employee how to use a piece of office equipment.
C) Giving front-line workers additional resources needed to provide faster and
better service to customers.
D) Developing a broad general strategy to help the organization meet its longterm growth objectives.
Answer: C
LG: 2/LL: 3
Page: 213
Rationale: Organizing includes creating the conditions and systems in which

everyone and everything works together to achieve an organizations objectives.
Many of todays organizations attempt to organize in ways that enable them to
please their customers at a profit.
7-223. Ed Flavorman, the chief executive of Flavor Best Ice Cream, believes that
alternative plans are almost as important as the primary operational plans
because the market is so competitive and unpredictable. Ed endorses:
A) tactical planning.
B) retroactive planning.
C) concurrent planning.
D) contingency planning.
Rationale: Contingency plans provide alternative courses of action for use if the
organization's primary plans fail to achieve their intended results.
7-226. A(n) __________is used by an organization to show who is accountable for the
completion of specific work and who reports to whom.
A) Balance sheet
B) Venn diagram
C) Stakeholder outline
D) Organization chart
7-239. Organizations that use self-managed teams often:
A) have very autocratic managers.
B) delegate more planning, organizing and controlling tasks to lower-level
managers.
C) eliminate most top management positions.
D) find they must increase in the number of middle managers to manage and
direct the teams.
7-240. A team of workers chosen from various departments of a firm is called a:
A) unidirectional group.
B) cross-functional team.
C) customer-focused team.
D) stakeholder-oriented organization.
7-244. ___________ involves recruiting, hiring, motivating, and retaining the best people
available to accomplish the company's objectives.
A) Directing
B) Planning
C) Leading
D) Staffing
7-252. Axel has just been promoted to a position in first-line management. Axel's new
position probably will require him to spend a lot of time:
A) developing strategic plans.
B) evaluating the daily performance of workers.
C) creating a vision.
D) traveling to different worksites.
Rationale: First-line managers are responsible for assigning specific jobs to
workers and evaluating the performance of employees on a daily basis.
CHAPTER 8
Chapter 8 Test
8-1.The design of a bureaucratic organization assumes a well educated workforce.
8-2.To better organize his business, Frank divides the required tasks into smaller jobs
and assigns each job to a specific employee. This is an example of
departmentalization.
Rationale: Dividing tasks into smaller jobs is called job specialization.
Departmentalization refers to the process of setting up individual departments to
do specialized tasks.
8-3.The division of labor and specialization often improves an employees job
performance.
8-4.Economies of scale occur when a firm operates more efficiently as it grows larger.
Rationale: Economies of scale is the concept that the bigger the firm, the more
efficient production becomes. This improved efficiency is the result of the
specialization of labor and purchasing raw materials in bulk.
8-5.The driving force behind the change in business organizations is the change in
consumer expectations.
8-6.The degree to which an organization allows lower level managers to make decisions
determines the degree of decentralization.
8-7.
An organizational hierarchy establishes one person at the top of an organization.

8-8.The greater the rate of employee turnover, the broader the span of control.
8-9.The flatter an organizations structure, the fewer managers are needed.
8-10.In a line organization, there are many specialists who serve as advisors and
assistants to the managers who make decisions.
8-11.While staff personnel have the authority to make policy decisions, line personnel
have the authority to advise and make suggestions.
8-12.Cross-functional teams are self-managed groups of employees empowered to work
with suppliers and customers to develop new products and give great service.
8-13. The design of a bureaucratic organization assumes a well educated workforce.
8-14.An organizations core competencies are those functions that the firm can perform
as well or better than anyone else in the world.
8-15.Reengineering is intended to improve the performance of an organization through
regular, incremental steps.
8-16. Reengineering is the fundamental rethinking and radical redesign of organizational

processes in order to achieve dramatic improvements in performance.
8-17.A firm's formal organization would be better suited than its informal organization to:
A) create an atmosphere of friendship and camaraderie among workers.
B) find answers to critical problems that require logical analysis.
C) find creative solutions to short-term problems.
D) find a way around bureaucratic rules and regulations in order to get things
done quickly.
8-18.In an inverted organization, the job of management is to:
A) closely monitor employee performance.
B) establish rules and regulations to guide worker behavior.
C) make all of the basic decisions.
D) assist and support front-line people.
Rationale: In an inverted organization, the most important people are the frontline personnel who are in direct contact with the customers. These employees
are given the flexibility and decision making authority to meet the needs of these
customers. The job of management is to assist and support these contact
people, not boss them around.
8-19.Excite Enterprises uses an accounting firm to handle the payroll and tax functions
for the firm. Using the services of another firm in this manner is an example of:
A) outsourcing.
B) functional reassignment.
C) core competencies.
D) benchmarking.
8-20. As a new employee in a bureaucratic organization, Nancy can expect a great
deal of independence and authority.
Rationale: In a bureaucratic organization, everyone is expected to follow specific
rules. One of the problems with this type of organization is that employees have
little flexibility to respond to customer wants and needs.
8-21. Centralized authority provides for the delegation of authority to employees who
are then better able to respond to customers' needs.
8-22. Departmentalization creates an environment in which people are trained in a

variety of managerial responsibilities.
8-23. Rome Corporation is organized into departments such as finance, production,
marketing, data processing, and accounting. Rome has chosen to
departmentalize by function.
Rationale: Departmentalization by function means to group workers into
departments based on similar skills, expertise, and resources.
8-24.Line managers issue orders, enforce discipline, and adjust the organization as
conditions change.
8-25.In large businesses, a line organization provides firms the ability to respond quickly
to a changing environment.
8-26.Line organizations clearly define the lines of authority and responsibility.
8-27.Matrix organizations bring together specialists from different parts of the firm to
work on specific projects.
8-28.The team specialists in a matrix organization remain part of the traditional line and
staff structure.
8-29.A matrix organization produces an environment that discourages cooperation and
teamwork.
8-30.Cross-functional teams are self-managed groups of employees empowered to work
with suppliers and customers to develop new products and give great service.
8-31.Cross-functional teams serve as advisory committees offering their expertise to line

decision makers.
8-32.Networking uses communication technology to link organizations allowing them to
work together on common objectives.
8-33.The Internet makes real time availability of data possible.
8-34.Transparency describes the relationship between a firm and its stockholders.
8-35.Transparency allows two companies to work more efficiently together.
8-36.Benchmarking requires organizations to compare each function against the best in
the world.
8-37.Competitive benchmarking rates an organizations products and operations against
the industry average.
8-38.Competitive benchmarking compares a company's practices, processes, and
products against the worlds best.
8-39.Restructuring involves relatively minor changes to an organization to better meet
the needs of management.
8-40.Inverted organizations empower employees by adding multiple layers of
management and long lines of communication.
8-41.In an inverted organization, the purpose of management is to assist and support

first-line employees, not boss them around.
8-42.A firms informal organization refers to the structure that identifies the authority,
responsibility, and position of people within the organization.
8-43.The informal organization of a business can help generate creative solutions to
short-term problems.
8-44.The formal organization of a firm provides the lines of authority to follow in routine
situations.
8-45.Organizing a business begins with:
A) acquiring the necessary resources.
B) choosing the best qualified employees.
C) developing an efficient plan of action.
D) determining the work to be done.
8-46.Dividing the required work among a group of employees is called a:
A) departmentalization.
B) delegation of responsibility.
C) division of labor.
D) separation of control.
8-47.Dividing tasks into smaller jobs is called:
A) job enrichment.
B) job specialization.
C) departmentalization.
D) division of authority.
8-48.The process of setting up individual departments to do specialized tasks is called:
A) departmentalization.
B) a division of labor.
C) job specialization.
D) delegation of authority.
8-49.In a bureaucratic organization:

A) departments communicate with each other on a regular basis.
B) employees follow strict rules and regulations.
C) customer satisfaction is the number one priority.
D) the first-line workers are empowered to respond to the needs of customers.
8-50.One advantage of a bureaucratic organization is that:
A) it is very responsive to the wants and needs of customers.
B) there are very few layers of management.
C) it encourages cooperation among different departments within the
organization.
D) employees know what is expected of them.

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CHAPTER 5

5-1. The corporation is the most common form of business ownership.

The stockholders in a corporation elect a board of directors to oversee the

Any corporation can qualify to be classified as an S corporation as long as it fills

5-74. Dr. Wright is interested in incorporating as an individual. While this is legally

advantage of corporations is that they provide their owners (stockholders) with

5-81. In a merger, two firms combine to form one company.

5-134. A ___________ is a business organization that is owned, and usually managed,

6-2.Entrepreneurship is another name for management.

Successful entrepreneurs accept the risk of failure.

It is important for an entrepreneur to be highly energetic.

Potential entrepreneurs would be well advised to surround themselves with

Entrepreneurial teams combine the creative marketing and production ideas of a

Micropreneurs is a term used to describe entrepreneurs who focus on the

6-19. The management of a nonprofit organization is much the same as the

6-40.For prospective entrepreneurs, enrolling in an Introduction to Business or Small

6-44.Which of the following government agencies is responsible for encouraging the

Todays workers require a different managerial style than workers of previous

Although downsizing has reduced the number of nonmanagerial jobs, it actually

Workers are becoming better educated and more self-directed.

Management is the art of getting things done through organizational resources.

7-85. The purpose of a cross-functional team is to train the members of a single

Anyone who is affected by an organizations policies and products is considered

Rationale: Leading involves communicating, guiding, training, coaching, and

Rationale: Organizing includes creating the conditions and systems in which

An organizational hierarchy establishes one person at the top of an organization.

8-16. Reengineering is the fundamental rethinking and radical redesign of organizational

8-22. Departmentalization creates an environment in which people are trained in a

8-31.Cross-functional teams serve as advisory committees offering their expertise to line

8-41.In an inverted organization, the purpose of management is to assist and support

8-49.In a bureaucratic organization:

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