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GCE O/L Business & Accounting Studies study materials
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GCE O/L Business & Accounting Studies practice questions

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Question 1Business and its Environment

Which of the following best describes the primary objective of a business organisation?

  1. To increase the number of government employees in a district
  2. To distribute free goods to all households without cost
  3. To satisfy human needs and wants by producing goods or services Correct answer.
  4. To reduce the total population of a country

Explanation

A business exists to identify human needs and wants and to satisfy them by producing and distributing goods or services, usually while earning a profit to survive. Government offices and charities have other purposes, so production to meet needs is the defining business objective.

Question 2Business and its Environment

A farmer grows vegetables and sells them directly to households in the nearby town. Which type of business activity does the farmer mainly perform?

  1. Provision of a professional service
  2. Wholesale distribution to retailers
  3. Production of goods by combining natural resources Correct answer.
  4. Extraction of natural resources from the earth

Explanation

Growing vegetables is a production activity because the farmer combines natural resources such as land, water and seed with labour to create goods that satisfy human wants. Extraction refers to taking resources directly from nature, such as mining or fishing, while services and wholesaling are different functions.

Question 3Business and its Environment

Which of the following is an example of a business operating in the tertiary sector?

  1. A farm that cultivates paddy for the local market
  2. A factory that assembles wooden furniture
  3. A company that provides internet connections to homes Correct answer.
  4. A firm that mines graphite for pencil manufacture

Explanation

The tertiary sector covers businesses that provide services rather than tangible goods, and supplying internet connections is a service. Manufacturing furniture, mining graphite and cultivating paddy all involve producing physical goods in the secondary or primary sectors.

Question 4Business and its Environment

Which feature distinguishes a public corporation from a privately owned company?

  1. It is owned and controlled by the government on behalf of the public Correct answer.
  2. It must distribute all its profit to private investors
  3. It cannot employ more than a fixed number of workers
  4. It is always registered under the Companies Act by shareholders

Explanation

A public corporation is established by a special statute and is owned and controlled by the state for public purposes, so its capital comes from government rather than private shareholders. Private companies are registered under company law and owned by shareholders who invest capital expecting returns.

Question 5Business and its Environment

Which of the following is a characteristic of a sole proprietorship?

  1. Ownership is shared among at least seven persons
  2. It must publish audited accounts for the public
  3. The owner has unlimited liability for the debts of the business Correct answer.
  4. Its capital is raised by issuing shares to the public

Explanation

In a sole proprietorship one person owns and manages the business, and there is no legal separation between owner and business, so the owner is personally liable for all debts. Shared ownership, public share issues and mandatory publication of accounts belong to company forms.

Question 6Business and its Environment

A partnership firm has three partners who have not signed a written agreement on profit sharing. Under ordinary partnership principles, how should profits be shared?

  1. Equally among all partners Correct answer.
  2. Entirely to the partner who manages the firm
  3. According to the amount of time each partner works
  4. According to the capital each partner contributed

Explanation

Where partners do not make an express agreement, the default rule is that profits and losses are shared equally, regardless of differences in capital or working time. Partners who want another arrangement must record it in a partnership agreement.

Question 7Business and its Environment

Which of the following is a direct benefit to a business of maintaining good customer relations?

  1. Automatic reduction of the firm's rent payments
  2. Guaranteed exemption from all government taxes
  3. Increased repeat purchases and customer loyalty Correct answer.
  4. Freedom from competition in the market

Explanation

Good customer relations build trust, so customers return and recommend the business, which raises sales and goodwill. No business gains tax exemption, lower rent or freedom from competition merely by treating customers well.

Question 8Business and its Environment

A bakery employs a cashier, a baker and a delivery driver. In which classification of business resources are these persons correctly included?

  1. Human resources Correct answer.
  2. Natural resources
  3. Financial resources
  4. Capital goods

Explanation

People who provide physical and mental effort to produce goods and services are human resources, so the cashier, baker and driver belong to this category. Natural resources come from nature, capital goods are man-made aids to production, and financial resources are money and credit.

Question 9Business and its Environment

Which of the following best explains why businesses specialise in producing particular goods or services?

  1. Specialisation allows efficient use of skills and resources, lowering average cost Correct answer.
  2. Specialisation guarantees that a firm will never make a loss
  3. Specialisation removes the need for any exchange between producers
  4. Specialisation prevents workers from becoming skilled at one task

Explanation

When a firm concentrates on what it can produce most efficiently, workers become skilled at repeated tasks and resources are used better, so output per unit of input rises and average cost falls. Exchange then becomes necessary, and specialisation does not guarantee profits.

Question 10Business and its Environment

A small grocery shop is located near a large supermarket that offers lower prices. Which strategy would most directly help the grocery shop compete?

  1. Reducing the range of goods to a single item
  2. Copying the supermarket's bulk purchasing contracts
  3. Offering personal service, home delivery and longer opening hours Correct answer.
  4. Raising prices above those of the supermarket

Explanation

A small shop cannot match a supermarket on price but can compete on convenience, personal attention and flexible hours, which are valued by nearby customers. Raising prices, cutting the product range and trying to copy large-scale buying would weaken its position further.

Question 11Business and its Environment

Which of the following is a function of the Central Bank of a country rather than of a commercial bank?

  1. Accepting deposits from individual customers
  2. Issuing currency notes on behalf of the government Correct answer.
  3. Granting housing loans to private households
  4. Providing overdraft facilities to small traders

Explanation

The Central Bank acts as the banker to the government and the banking system and has the sole authority to issue currency notes. Accepting deposits, granting loans and providing overdrafts are ordinary commercial banking services offered to the public.

Question 12Business and its Environment

A company's activities pollute a river used by villagers downstream. Which statement best reflects the business's social responsibility?

  1. The company should treat its waste before releasing it, even if costs rise Correct answer.
  2. The company should pay the villagers only if a court orders it
  3. The company should ignore the issue because pollution is not illegal
  4. The company should shift the factory to another river without treatment

Explanation

Social responsibility requires a business to avoid harming the community and environment in which it operates, so preventing pollution through waste treatment is the responsible action. Ignoring harm, acting only under legal compulsion or merely relocating the damage does not discharge that duty.

Question 13Business and its Environment

Which of the following correctly states a difference between goods and services?

  1. Goods are always produced by the government, while services are produced by firms
  2. Goods cannot be transported, while services can be transported
  3. Goods are intangible, while services are tangible
  4. Goods can be stored, while services cannot be stored Correct answer.

Explanation

Goods are physical and tangible, so they can be produced in advance and stored until sold. Services are intangible and are consumed as they are provided, so they cannot be stored for later use.

Question 14Business and its Environment

A country's economy moves from being mainly agricultural to having a large manufacturing base. Which change is most likely to accompany this transformation?

  1. A decline in the total output of the economy
  2. An increase in the proportion of workers in the secondary sector Correct answer.
  3. A fall in the share of workers employed in factories
  4. The complete disappearance of the primary sector

Explanation

Industrialisation shifts employment and output from agriculture towards manufacturing, so the secondary sector's share of workers rises. The primary sector usually shrinks in relative terms rather than vanishing, and total output normally grows during such a transformation.

Question 15Business and its Environment

A firm sells 2,000 units at Rs. 50 each and incurs total costs of Rs. 80,000. What is the profit earned by the firm?

  1. Rs. 180,000
  2. Rs. 100,000
  3. Rs. 80,000
  4. Rs. 20,000 Correct answer.

Explanation

Total revenue equals 2,000 units multiplied by Rs. 50, which is Rs. 100,000. Profit is revenue minus total cost, so Rs. 100,000 minus Rs. 80,000 gives Rs. 20,000.

Question 16Business and its Environment

A company wants to raise a large amount of capital from the general public and also wishes its shares to be traded on a stock exchange. Which form of organisation is most suitable?

  1. A public limited company Correct answer.
  2. An ordinary partnership
  3. A sole proprietorship
  4. A statutory public corporation

Explanation

Only a public limited company may invite the general public to subscribe for shares, and its shares can be listed and traded on a stock exchange. Sole proprietorships, partnerships and statutory corporations cannot raise capital by offering shares to the public.

Question 17Business and its Environment

Which of the following best explains why a business environment is described as dynamic?

  1. A business environment applies only to large manufacturing firms
  2. The factors affecting a business remain fixed for many decades
  3. The factors affecting a business change continuously over time Correct answer.
  4. A business environment consists only of government departments

Explanation

The business environment is dynamic because external factors such as technology, consumer tastes, competition and government policy keep changing, forcing firms to adapt. It is not confined to government bodies or to firms of a particular size.

Question 18Business and its Environment

A firm's sales revenue rises from Rs. 500,000 to Rs. 600,000 while its total costs rise from Rs. 450,000 to Rs. 570,000. What happened to the firm's profit?

  1. Profit fell from Rs. 50,000 to Rs. 30,000 Correct answer.
  2. Profit fell from Rs. 150,000 to Rs. 30,000
  3. Profit rose from Rs. 50,000 to Rs. 30,000
  4. Profit remained unchanged at Rs. 50,000

Explanation

Profit is revenue minus cost. Initially Rs. 500,000 minus Rs. 450,000 gives Rs. 50,000, and later Rs. 600,000 minus Rs. 570,000 gives Rs. 30,000, so profit fell by Rs. 20,000 even though sales rose. This shows that rising revenue does not guarantee rising profit when costs increase faster.

Question 19Business and its Environment

A government decides to increase the tax on imported raw materials used by local manufacturers. Which is the most likely effect on those manufacturers?

  1. Their production costs will rise and their competitiveness may weaken Correct answer.
  2. They will be completely protected from foreign competition
  3. They will no longer need to pay any taxes to the government
  4. Their production costs will fall and their profits will certainly rise

Explanation

A tax on imported raw materials increases the price paid for inputs, raising production costs and possibly making local goods more expensive than foreign alternatives. Protection from competition and exemption from other taxes do not follow from such a tax.

Question 20Business and its Environment

Two firms in the same industry merge. Which outcome would most clearly indicate that the merger has increased market concentration?

  1. The combined firm reduces its advertising expenditure
  2. The combined firm employs fewer managers in its head office
  3. The combined firm controls a substantially larger share of total industry sales Correct answer.
  4. The combined firm changes its registered business name

Explanation

Market concentration measures how much of total industry sales are controlled by a few firms, so a substantially larger market share after the merger shows increased concentration. Changes in advertising, head-office staffing or the firm's name do not by themselves measure concentration.

Question 21Entrepreneurship and the Business Idea

Which statement best describes the term 'entrepreneur' as used in Business and Accounting Studies?

  1. A person employed by a company to keep its accounting records
  2. A person who identifies a business opportunity and takes the risk of starting a venture to exploit it Correct answer.
  3. A person who supplies raw materials to a factory on credit
  4. A person who lends money to small businesses at a fixed interest rate

Explanation

An entrepreneur is the person who spots a need in the market, gathers the factors of production and bears the risk of the venture's success or failure. Record keeping, lending and supplying materials are supporting functions carried out by other parties such as accountants, financiers and suppliers.

Question 22Entrepreneurship and the Business Idea

Nimal wants to start a small bakery. Which of the following is a source of a business idea that involves studying what competitors already offer in his town?

  1. Borrowing money from a bank before deciding what to sell
  2. Buying an oven before identifying any customer need
  3. Conducting a market survey of existing bakeries and customers Correct answer.
  4. Consulting the telephone directory for bakery names only

Explanation

A market survey collects information from existing sellers and potential customers, which reveals gaps and unmet needs that can be turned into a business idea. Simply listing names, raising finance or buying equipment does not generate information about what the market wants.

Question 23Entrepreneurship and the Business Idea

Which of the following best describes the meaning of 'innovation' in the context of entrepreneurship?

  1. Introducing a new or improved product, process or way of serving customers Correct answer.
  2. Increasing the price of a product to raise profit
  3. Copying an existing product exactly as it is sold by a competitor
  4. Reducing the number of employees to lower costs

Explanation

Innovation means putting a new idea into practice, whether through a new product, a better production method or a new way of reaching customers. Price changes and staff reductions are management decisions that do not by themselves create anything new.

Question 24Entrepreneurship and the Business Idea

A student notices that many households in her village buy bottled drinking water because the well water is unsafe. She plans to start a small water-filtering service. In entrepreneurial terms, what has she identified?

  1. A source of short-term bank credit
  2. A legal requirement for registering a company
  3. A fixed cost that must be paid before trading begins
  4. A business opportunity arising from an unmet customer need Correct answer.

Explanation

A business opportunity exists where a real need in the market is not being met and can be served profitably. The unsafe well water and the households' willingness to buy bottled water together show a gap that a filtering service could fill.

Question 25Entrepreneurship and the Business Idea

Which of the following is a characteristic commonly expected of a successful entrepreneur?

  1. Willingness to take calculated risks and accept responsibility for results Correct answer.
  2. Waiting for government officers to decide what the business should produce
  3. Avoiding all decisions that involve uncertainty
  4. Refusing to change a plan once it has been written down

Explanation

Entrepreneurs must commit resources before outcomes are known, so they take calculated risks and answer for the results. Avoiding uncertainty, depending on others for decisions or refusing to adapt all reduce the chance of success.

Question 26Entrepreneurship and the Business Idea

Which of the following is the main purpose of preparing a business plan before starting a new venture?

  1. To guarantee that the business will make a profit in its first year
  2. To fix the final selling price of every product permanently
  3. To replace the need for any market research
  4. To set out the idea, market, operations and finances so that the venture can be evaluated and funded Correct answer.

Explanation

A business plan brings together the description of the idea, the market analysis, the production or service plan and the financial forecasts. This document lets the entrepreneur test the feasibility of the venture and helps persuade lenders or investors to provide finance.

Question 27Entrepreneurship and the Business Idea

Kamala plans to produce and sell hand-made batik shirts. Which combination correctly lists a fixed cost and a variable cost of her business?

  1. Monthly shop rent as a fixed cost and wax and dye as variable costs Correct answer.
  2. Wax and dye as fixed costs and the shop rent as a variable cost
  3. Both the shop rent and the wax and dye as fixed costs
  4. Monthly shop rent as a variable cost and wax and dye as fixed costs

Explanation

Rent is paid at the same amount each month whatever quantity is produced, so it is fixed. Wax and dye are consumed in proportion to the number of shirts made, so their total rises with output and they are variable costs.

Question 28Entrepreneurship and the Business Idea

A new snack producer finds that her monthly fixed costs are Rs. 20,000 and the variable cost per packet is Rs. 30. If she sells each packet for Rs. 50, how many packets must she sell to break even?

  1. 2,000 packets
  2. 667 packets
  3. 1,000 packets Correct answer.
  4. 400 packets

Explanation

Break-even quantity equals fixed costs divided by the contribution per unit, and contribution is selling price minus variable cost, that is Rs. 50 minus Rs. 30 equals Rs. 20. Dividing Rs. 20,000 by Rs. 20 gives 1,000 packets.

Question 29Entrepreneurship and the Business Idea

Which of the following is the most suitable source of finance for a young entrepreneur who needs a small amount of money for a very short period to buy raw materials for a confirmed order?

  1. A short-term bank overdraft or trade credit from the supplier Correct answer.
  2. Selling a piece of land owned by the family
  3. A long-term bank loan repayable over ten years
  4. Issuing ordinary shares to the public

Explanation

Short-term needs should be matched with short-term finance so that the cost of borrowing is not carried longer than necessary. An overdraft or supplier credit can be repaid from the proceeds of the confirmed order, whereas long-term sources would commit the business to unnecessary interest or loss of ownership.

Question 30Entrepreneurship and the Business Idea

A sole proprietor keeps his business cash in the same bank account as his household money and records both together. Which accounting principle is being violated?

  1. The consistency concept
  2. The business entity concept Correct answer.
  3. The going concern concept
  4. The prudence concept

Explanation

The business entity concept treats the business as separate from its owner, so business transactions must be recorded apart from the owner's private affairs. Mixing household money with business cash destroys that separation and makes the financial statements unreliable.

Question 31Entrepreneurship and the Business Idea

Which of the following best explains why a small entrepreneur should prepare a cash budget for the coming three months?

  1. It shows the profit earned during the period in place of an income statement
  2. It calculates the depreciation of the business machinery
  3. It records only the transactions that have already been settled in cash
  4. It forecasts expected cash receipts and payments so that shortages can be anticipated Correct answer.

Explanation

A cash budget is a forward-looking statement of expected receipts and payments, which allows the entrepreneur to arrange finance before a shortage arises. It deals with timing of cash rather than with profit, and depreciation is a non-cash expense excluded from it.

Question 32Entrepreneurship and the Business Idea

Ravi runs a bicycle repair shop. A customer pays Rs. 5,000 in advance for repairs that will be completed next month. How should Ravi treat this amount in his records at the time of receipt?

  1. Record it as income of the current month
  2. Ignore it until the repairs are completed
  3. Record it as a liability, being an amount received in advance for work not yet done Correct answer.
  4. Record it as a fixed asset of the business

Explanation

Money received before the service is performed creates an obligation to complete the work, so it is a liability often called income received in advance. It becomes income only when the repairs are carried out, and ignoring a cash receipt would make the records incomplete.

Question 33Entrepreneurship and the Business Idea

A small garment business sells on credit to retailers. Which policy would most directly reduce the risk of bad debts?

  1. Paying suppliers earlier than the agreed date
  2. Increasing the selling price of every item
  3. Allowing longer credit periods to attract more customers
  4. Checking the creditworthiness of customers and setting a clear credit limit Correct answer.

Explanation

Bad debts arise when customers fail to pay, so the most direct control is to assess each customer's ability and willingness to pay before granting credit. A credit limit caps the exposure, while longer credit periods, higher prices and early supplier payments do not test customer reliability.

Question 34Entrepreneurship and the Business Idea

Which of the following is a benefit of registering a new small business with the relevant authorities?

  1. It guarantees that the business will face no competition
  2. It exempts the business from paying any taxes
  3. It removes the need to keep accounting records
  4. It gives legal recognition that may help in obtaining bank loans and entering formal markets Correct answer.

Explanation

Registration provides legal recognition of the business, which lenders and larger customers often require before dealing with it. It does not remove record-keeping duties, prevent competitors from entering or exempt the business from taxation.

Question 35Entrepreneurship and the Business Idea

An entrepreneur compares two options: opening a small grocery near a newly built housing estate, or opening a similar shop in an area already served by three large supermarkets. Which statement best reflects an entrepreneurial evaluation of these options?

  1. Neither option can be evaluated without a bank loan already approved
  2. The second option is better because competition always improves a new firm's sales
  3. The first option offers a market with less competition and unmet demand from new residents Correct answer.
  4. Both options are equally attractive because the product is the same

Explanation

Evaluation of a business idea weighs demand against competition, and the new estate offers residents whose needs are not yet served. Heavy existing competition in the second area makes it harder for a new entrant to win customers, and finance decisions follow the choice of idea.

Question 36Entrepreneurship and the Business Idea

Which of the following best distinguishes an entrepreneur from an investor in a new business?

  1. The entrepreneur provides money while the investor manages daily operations
  2. The entrepreneur organises and manages the venture and bears its operating risk, while the investor supplies funds expecting a return Correct answer.
  3. The entrepreneur receives a fixed interest payment while the investor receives dividends
  4. The entrepreneur always owns shares while the investor never does

Explanation

The entrepreneur combines resources and runs the venture, taking responsibility for its day-to-day decisions and its operating risk. The investor contributes capital and expects a return but does not normally manage the business, so the two roles differ in function rather than in the form of ownership alone.

Question 37Entrepreneurship and the Business Idea

A small firm's sales for the year are Rs. 600,000, its cost of goods sold is Rs. 360,000 and its other operating expenses are Rs. 140,000. What is its net profit for the year?

  1. Rs. 360,000
  2. Rs. 460,000
  3. Rs. 240,000
  4. Rs. 100,000 Correct answer.

Explanation

Net profit is sales revenue less the cost of goods sold and all other operating expenses, that is Rs. 600,000 minus Rs. 360,000 minus Rs. 140,000. This gives Rs. 100,000, and the figure shows why both cost categories must be deducted.

Question 38Entrepreneurship and the Business Idea

A young entrepreneur wants to expand a successful home-based cake business but has limited savings and no collateral. Which combination of actions is most realistic for raising the needed finance?

  1. Approaching a microfinance institution, using retained profits and inviting a partner to contribute capital Correct answer.
  2. Waiting until the business has no cash at all before seeking help
  3. Issuing debentures to the public through the stock exchange
  4. Applying for a long-term loan without security and ignoring repayment capacity

Explanation

Microfinance institutions, retained profits and an additional partner suit a small venture with limited security because they match modest finance needs with available capacity. Large-scale market borrowing is unrealistic for such a firm, and delaying until cash runs out weakens its bargaining position.

Question 39Entrepreneurship and the Business Idea

An entrepreneur estimates that a new machine costing Rs. 200,000 will increase annual net cash inflows by Rs. 60,000 for five years. Which statement is the most accurate evaluation of the proposal?

  1. The proposal cannot be judged without knowing the firm's rent
  2. The machine recovers its cost in about 3.3 years, so it pays back within its five-year life Correct answer.
  3. The machine can never pay back its cost because inflows are smaller than the cost
  4. The payback period is five years because that is the life of the machine

Explanation

The payback period is the capital cost divided by the annual net cash inflow, so Rs. 200,000 divided by Rs. 60,000 gives about 3.3 years. Because this is shorter than the five-year life, the machine recovers its cost while still generating inflows, which is a favourable sign.

Question 40Entrepreneurship and the Business Idea

A sole proprietor takes goods worth Rs. 8,000 from the business stock for personal use and records nothing. What is the effect on the business's financial statements?

  1. Stock and capital are both overstated by Rs. 8,000 Correct answer.
  2. Stock is overstated and profit is understated by Rs. 8,000
  3. Stock is overstated by Rs. 8,000 while capital is understated
  4. Stock and profit are overstated and capital is overstated

Explanation

Goods withdrawn by the owner are drawings, which reduce stock and reduce the owner's capital, so failing to record the withdrawal leaves both balances too high. The correct entry debits drawings and credits purchases or stock, keeping the business entity separate from the owner.

Question 41Business Ownership and Legal Forms

A business owned and controlled by a single person, who keeps all profits and bears unlimited liability for its debts, is best described as which form of ownership?

  1. A partnership
  2. A co-operative society
  3. A sole proprietorship Correct answer.
  4. A public limited company

Explanation

A sole proprietorship has one owner who supplies capital, takes all profit and is personally liable without limit for business debts. The other forms involve shared ownership or limited liability created by registration. This combination of single ownership and unlimited liability is the defining feature of the sole trader.

Question 42Business Ownership and Legal Forms

Which document, when issued by the Registrar of Companies, brings a company into legal existence as a separate legal person?

  1. The memorandum of association
  2. The certificate of incorporation Correct answer.
  3. The articles of association
  4. The prospectus

Explanation

The certificate of incorporation is the official document that registers the company and marks the date from which it exists as a separate legal person. The memorandum and articles are internal constitutional documents submitted for registration, not the proof of birth of the company. A prospectus only invites the public to buy shares.

Question 43Business Ownership and Legal Forms

In a partnership, a partner whose liability for the firm's debts is limited to the capital he has agreed to contribute is known as what?

  1. A limited partner Correct answer.
  2. A nominal partner
  3. A sleeping partner
  4. A general partner

Explanation

A limited partner contributes capital but is liable only up to the amount agreed, provided he does not take part in management. A general partner, by contrast, has unlimited joint and several liability. A sleeping partner may share profits without managing but is still a general partner unless liability is formally limited.

Question 44Business Ownership and Legal Forms

A company wishes to raise a large amount of capital from the general public by offering its shares for sale. Which type of company must it be?

  1. A private limited company
  2. A sole proprietorship
  3. A partnership
  4. A public limited company Correct answer.

Explanation

Only a public limited company may invite the general public to subscribe for its shares, and it must satisfy minimum capital and disclosure requirements. A private limited company is restricted to a small number of members and may not offer shares to the public. Sole proprietorships and partnerships cannot issue shares at all.

Question 45Business Ownership and Legal Forms

Which feature distinguishes a co-operative society from an ordinary company?

  1. It must always be owned by the government
  2. It is controlled on the principle of one member, one vote Correct answer.
  3. It cannot distribute any surplus to its members
  4. Its members have unlimited liability for its debts

Explanation

A co-operative society is democratically controlled, so each member has one vote regardless of the number of shares held. This differs from a company, where voting power usually depends on shareholding. Co-operatives may also pay a limited dividend or patronage bonus to members.

Question 46Business Ownership and Legal Forms

Which of the following is an advantage of a sole proprietorship over a partnership?

  1. The business continues after the owner's death
  2. The owner keeps all profits and makes decisions quickly Correct answer.
  3. The owner has limited liability
  4. The owner can raise capital more easily

Explanation

Because one person owns and manages the business, decisions can be taken without consulting others and the whole profit belongs to the owner. Partnerships can pool more capital from several partners and spread risk. Sole proprietorships also lack perpetual succession and limited liability.

Question 47Business Ownership and Legal Forms

Which of the following is a disadvantage of forming a partnership rather than trading as a sole proprietor?

  1. Profits must be shared among the partners Correct answer.
  2. The firm cannot own property
  3. The partners have limited liability
  4. The firm must issue a prospectus

Explanation

In a partnership the profit is divided among the partners according to the partnership agreement, so each partner receives less than a sole owner would. Partnerships may own property in the firm name, and general partners actually carry unlimited liability. Only public companies issue prospectuses.

Question 48Business Ownership and Legal Forms

The document that sets out the internal rules for managing a company, such as the powers of directors and the conduct of meetings, is the what?

  1. Memorandum of association
  2. Certificate of incorporation
  3. Articles of association Correct answer.
  4. Share certificate

Explanation

The articles of association regulate the internal management of the company, including directors' powers, meetings and voting. The memorandum governs the company's relationship with the outside world by stating its name, objects and capital. A share certificate is simply evidence of share ownership.

Question 49Business Ownership and Legal Forms

A partner who contributes capital and shares profits but takes no active part in the day-to-day management of the firm is called what?

  1. An active partner
  2. A limited partner
  3. A nominal partner
  4. A sleeping partner Correct answer.

Explanation

A sleeping partner, also called a dormant partner, invests capital and shares profits but does not manage the business. An active partner manages the firm, while a nominal partner lends only a name. A limited partner is defined by limited liability, not simply by absence from management.

Question 50Business Ownership and Legal Forms

Which statement correctly describes the liability of shareholders in a public limited company?

  1. They are liable for the company's debts in proportion to their salaries
  2. They are liable only for the amount unpaid on their shares Correct answer.
  3. They have no liability of any kind to the company
  4. They are liable without limit for all company debts

Explanation

Shareholders of a limited company are liable only for any amount remaining unpaid on the shares they hold. Once shares are fully paid, they have no further personal liability for company debts. This limited liability is a key reason why companies can attract many investors.