Exam

Name___________________________________

MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.

1) One of the disadvantages of operating a business as a sole trader is:

A) you have limited liability for the debts of the business.
B) your creditors are not legally required to help you pay your business debts.
C) you have unlimited liability for the debts of the business.
D) banks are prohibited under state and federal legislation from lending the sole traders more than 50% of
the value of the business.
Answer: C

2) One of the advantages of running a business as a sole trader (ST) is that:

A) the ST usually is not required to register a business name.
B) the business is usually easier and cheaper to set up than other business structures.
C) the ST usually has greater access to funds than a partnership.
D) the business can keep operating after the death of the ST.
Answer: B

3) A partnership is defined as:

A) 3 or more parties carrying on a business with a view to make a profit.
B) 2 or more parties carrying on any sort of work in common with a view to either make a profit or distribute
proceeds to charity.
C) 2 or more parties carrying on a business in common with a view to make a profit.
D) 2 or more parties carrying on a business or charitable work in common.
Answer: C

4) One of the features of a partnership is that:

A) it must be set up by deed which is an expensive and complicated process.
B) partners are liable personally for partnership debts.
C) partners are not liable personally for partnership debts.
D) the profit each partner receives is decided by the managing partner.
Answer: B

5) An unpaid creditor of a partnership has the right to:

A) sue any partner.
B) advise the Australian Taxation Office so the debt can be paid from taxes that are later collected by the
Australian Taxation Office.
C) sue any shareholder.
D) put the partnership into liquidation.
Answer: A

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 6) What was the main rule that was established in Salomon's Case (1897)?
A) A person who was the main shareholder and director of a company could also be an employee of the
company.
B) A company is separate from the person who controls it.
C) A director who takes no part in the daily business of the company may be liable for debts if the company
becomes insolvent.
D) A person cannot escape liability by hiding behind the 'corporate veil'.
Answer: B

7) One of the major effects of incorporation (the creation of a company) is that:

A) the directors are liable for all debts of the company.
B) the shareholders are liable for all debts of the company.
C) the company becomes a separate legal entity.
D) the sole trader business that was established before the company no longer has a continuous legal life.
Answer: C

8) A company is a separate legal entity. This means that:

A) the shareholders are entirely separate from the management.
B) the directors and the shareholders are a combined legal personality.
C) the directors of the company are separate from the decision making.
D) the company has the legal rights and liabilities of a person.
Answer: D

9) What was the main rule that was established in Lee v Lee's Air Farming Ltd (1961)?
A) A company is separate from the person who controls it.
B) A person who was the main shareholder and director of a company could also be an employee of the
company.
C) A person cannot escape liability by hiding behind the 'corporate veil'.
D) A director who takes no part in the daily business of the company may be liable for debts it incurs when it
was insolvent.
Answer: B

10) What was the main rule that was established in Gilford Motors v Horne (1933)?
A) The corporate veil can be lifted if the company was used as a 'sham' to breach a contract.
B) A person who was the main shareholder and director of a company could also be an employee of the
company.
C) A director who takes no part in the daily business of the company may be liable for debts it incurs when it
was insolvent.
D) A company is separate from the person who controls it.
Answer: A

11) A limited liability company (one limited by shares) is one where:

A) the company is not liable for any debts.
B) shareholders are only liable for amounts they owe for unpaid shares.
C) the company's liability is limited to 75% of its debts.
D) the company's liability is limited to no more than 50% of its debts.
Answer: B

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12) Which of the following statements is not true in regards to companies?
A) Members are only liable for the debts of the company if they have not fully paid for their shares.
B) The business can continue if the directors die or resign their positions.
C) They must report to the Australian Securities and Investments Commission (ASIC).
D) Directors usually require shareholder approval for important management decisions.
Answer: D

13) Which of the following statements is true in regard to a company limited by guarantee?
A) An example of company limited by guarantee is the Australian Society of Certified Practising
Accountants.
B) Unless the company is exempted by the ASIC, it must include 'Limited' or 'Ltd' in its name.
C) The liability of the members is limited to the monetary sum each member has agreed to contribute if the
company is wound up.
D) All of the above.
Answer: D

14) Which of the following statements is not true in regard to a proprietary company?
A) It must not invite investment from the public.
B) It must have at least member and one director, who could be the same person.
C) Its activities must be restricted to proper activities.
D) It must have no more than 50 non-employee shareholders.
Answer: C

15) Which of the following criteria must be satisfied before a company can be classified as a small proprietary
company?
A) It has no more than one shareholder and two directors.
B) It has annual gross operating revenue of less than $25 million.
C) It has annual consolidated gross assets of less than $12.5 million at the end of the financial year.
D) All of the above
E) B and C.
Answer: E

16) A director who is a full-time employee of a company and devotes his/her working time to managing a
company is described as:
A) a chairperson.
B) a non-executive director.
C) an associate director.
D) an executive director.
E) a de facto director.
Answer: D

17) A company's constitution (and any replaceable rules it adopts) create a contact between:
A) The company and its directors and other officers.
B) The company and its members.
C) Members and Members.
D) All of the above.
E) A and B only.
Answer: D

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18) A company's constitution can only be changed if the members:
A) pass a unanimous (100%) resolution.
B) advise the ASX that it wishes to change its names.
C) pass (vote for) a special resolution.
D) pass an ordinary resolution.
Answer: C

19) Which of the following common law duties are imposed on directors of a company?
A) To act in good faith and the best interests of the company.
B) To avoid conflicts of interest.
C) To be personally liable for unpaid debts.
D) All of the above.
E) A and B only.
Answer: E

20) Which of the following statements about ASIC v Adler (2002) is not correct?
A) Adler had committed criminal breaches, s 184.
B) Adler had acted without good faith, s 181.
C) Adler had failed to act with reasonable care and diligence, s 180 (1).
D) Adler was disqualified as a company director for 20 years.
E) Adler had misused his position to gain a personal advantage, s 182.
Answer: A

21) Directors may escape liability for breaching their statutory duty to act with care and diligence under s 180(1) if
they can satisfy the business judgment rule. Which of the following statements about the rule is true?
A) Directors must satisfy three out of the four tests. B) Directors must satisfy all four of the tests.
C) Directors must satisfy one out of four tests. D) Directors must satisfy two out of the four tests.
Answer: B

22) Which of the following statements about the maintenance of capital rule is/are true?
A) Companies must not pay a dividend unless its assets exceed its liabilities.
B) The relevant section of the Corporations Act is s 245T.
C) A company may reduce its capital in some circumstances.
D) All of the above.
E) A and B only.
Answer: D

23) There are two types of charges over the assets of a company. These are called:
A) Fixed and floating. B) Personal and business.
C) General and specific. D) Mortgage and insurance.
Answer: A

24) A debenture allows a company to raise capital by borrowing money which is secured (guaranteed) by:
A) a personal guarantee by the directors.
B) the creditor's right to sell specific assets, if the debt is unpaid.
C) the creditor's rights to become the legal owner of specific assets if the debt is unpaid.
D) all of the above
Answer: B

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25) Which of the following statements regarding a public company is not true?
A) It can raise finance through offering equity - selling shares to the public.
B) It can raise finance by obtaining a secured or unsecured loan from a bank or other credit provider.
C) It can raise finance by selling debentures - asking the public to loan money to the company.
D) It can raise finance by borrowing from shareholders.
Answer: D

26) It is illegal to use price sensitive information that is not generally available to the public to buy or sell shares or
other securities. This offence is known as:
A) market manipulation. B) share manipulation.
C) insolvent trading. D) insider trading.
Answer: D

27) Which of the following statements about fundraising and disclosure by corporations is not true?
A) Proprietary companies that seek an investment of up to $500 000 from one investor will not breach the
Corporations Act.
B) All prospectuses must be registered and checked by the ASIC to ensure they comply with the law and do
not contain misleading or deceptive statements.
C) False or misleading statements in the prospectus could make the parties who issued the prospectus liable
for financial losses that result.
D) Public companies are usually required to issue a prospectus before inviting the public to subscribe for
shares or debentures.
Answer: B

28) A fixed charge allows a company to raise capital by borrowing money which is secured (guaranteed) by:
A) a personal guarantee by the directors
B) the creditor's right to take ownership of the assets if the debt is unpaid.
C) the creditor's right to sell specific assets if the repayment agreement is broken.
D) the creditor's rights to appoint a fixer d'affaires to investigate the company if the repayment agreement is
broken.
Answer: C

29) A floating charge allows a company to raise capital by borrowing money which is secured (guaranteed) by:
A) the creditor's right to appoint a Plimsoll salvage manager if the repayment agreement is broken.
B) a personal guarantee by the directors.
C) assets that can be used, sold or transferred by the company until the repayment agreement is broken.
D) the creditor's right to sell specific assets if the repayment agreement is broken.
Answer: C

30) Which of the following statements about the rights of minority shareholders is/are true?
A) They can ask the court to wind up (terminate) the company because it is 'just and equitable to do so'.
B) They can apply to the court for remedies if the conduct of the company is oppressive, unfairly
discriminatory or unfairly prejudicial.
C) They may be able to sue parties on behalf of the company if the company is unwilling or unable to sue.
D) All of the above.
E) A and B only.
Answer: D

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31) Every company is required by s 286 of the Corporations Act to keep financial records that must:
A) correctly record and explain its transactions and financial position and performance.
B) enable true and fair financial statements to be prepared and audited.
C) be sent to shareholders as evidence of the company's financial position.
D) achieve all of the above.
E) achieve A and B only.
Answer: E

32) Which of the following statements is/are true in relation to an auditor's statutory duties?
A) They must form an opinion about whether the financial report gives a true and fair view of the company's
financial position.
B) They must form an opinion about whether the company has kept sufficient financial records.
C) They must inform ASIC if they know beyond reasonable doubt that the company has breached the
Corporations Act.
D) All of the above.
E) A and B only.
Answer: E

33) If a company is in financial trouble the directors may protect themselves from liability for insolvent trading by
appointing:
A) A receiver will receive the accounts and negotiate with secured creditors.
B) An administrator who will try to resolve the company's financial problems.
C) A secured creditor who will try to prevent other creditors from winding up the company.
D) A liquidator who will try to raise as much finance as possible within 30 days.
Answer: B

34) Which of the following statements is not true in relation to good corporate governance (GCG)?
A) Key issues in GCG include the business systems, relationships between stakeholders, directors' duties and
the composition of the board of directors.
B) GCG is interconnected with how a company is directed and controlled.
C) GCG is concerned with behaviour and relationships, values and ethics, and the integrity with which the
company is conducted.
D) The key goals of GCG are to set up a good model, tick all the necessary boxes and ensure GCG is
copiously referred to in the annual report.
E) None of the above. They are all true.
Answer: D

35) The principles of good corporate governance issued by the Australian Securities Exchange Corporate
Governance Council apply to:
A) all listed public companies except for NL companies.
B) listed public companies.
C) public companies.
D) all companies.
E) all business structures, including partnerships.
Answer: B

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36) John has placed his assets into a business structure which allows him to decide what income his family
members will receive and to retain considerable control over the running of the business. This business
structure is called:
A) a trust. B) a partnership.
C) a no liability company. D) a proprietary company.
Answer: A

37) A discretionary trust occurs when:

A) the trustees have the choice about how to distribute the trust income.
B) a court presumes from the circumstances that a trust was intended.
C) a court rules that it is equitable for property in trust to be returned the party who created the trust.
D) each beneficiary is entitled to a specific equal share.
Answer: A

38) A fixed entitlement trust occurs when:

A) each beneficiary is entitled to a specific equal share.
B) a court presumes from the circumstances that a trust was intended.
C) the trustees have the choice about how to distribute the trust income.
D) a court rules that that it is equitable for property in trust to be returned the party who created the trust.
Answer: A

39) Which of the following usually occurs in a franchise agreement?

A) The franchisee agrees to pay a licence fee and royalties for the right to use or sell the subject matter of the
franchise.
B) The franchisee agrees to market the intellectual property of the franchisor.
C) The franchisor owns the rights to any products, trade names and concepts that are the basis of the
franchise.
D) All of the above.
E) A and B only.
Answer: D

40) Under the Franchising Code of Conduct what must the franchisor do before entering into a franchise
agreement?
A) Make a full disclosure of any risks to the franchisee.
B) Require proof from the franchisee that the franchisee has obtained independent legal advice about the key
aspects of the franchise agreement.
C) Provide a bank guarantee to support the financial stability of the franchise business.
D) All of the above.
E) A and B only.
Answer: E

41) Which of the following statements is not true concerning a franchise?

A) Franchisors must give a detailed disclosure document to any person who is considering becoming a
franchisee.
B) Franchisees are entitled to a 7-day cooling-off period after signing a franchise agreement.
C) Franchisors must transfer their intellectual property rights in a geographical area to the franchisee who
has bought the franchise rights to that area.
D) Franchisees are protected by a mandatory (compulsory) code of conduct.
Answer: C

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42) One of the major reasons for an association, such as an amateur sports club to become incorporated is that:
A) it becomes eligible for insurance cover.
B) profits cannot be distributed to the members.
C) individual office holders are not personally liable for the debts of the association.
D) the financial reporting requirements are less demanding.
Answer: C

43) One of the purposes of requiring businesses to register business names is:
A) to assist ASIC to supervise and investigate illegal businesses.
B) to assist creditors or customers to contact business operators.
C) to provide greater privacy protection for business operators.
D) to protect businesses from competition from interstate operators.
Answer: B

44) Which of the following statements about business names is not true?
A) One of the main aims of the Business Names Act is to provide an easily accessible public record of business
names.
B) Companies must register their business name that is different from their company name if they use their
company name to trade with the public.
C) Most businesses are required to register a business name.
D) An application for a business name that closely resembles one that is already registered is likely to be
rejected.
Answer: B

45) A business does not have to register a business name if it operates under:
A) the surname and first name or initials of the business owner.
B) the name of a registered company.
C) exemptions available through the Financial Transactions Reports Act.
D) all of the above.
E) A and B only.
Answer: E

46) Joel Lemur is a sole trader computer consultant who operates under the business name ' Lemur & Co'. He also
advertises online under the business name as 'JL Fix IT'. To comply with business names legislation Joel must
register:
A) 'Lemur & Co' only. B) both names as company names.
C) 'JL Fix IT' only. D) both names as business names.
Answer: C

47) Which of the following statements about the Budget Rent -A Car case is true?
A) 'Big Budget' won because it had previously registered the 'Budget' business name in the Northern
Territory and therefore it had established a good reputation (good will) in that area.
B) "Little Budget' lost because it had not registered its business name in all the Australian states and
territories.
C) 'Little Budget' lost because it was trying to pass itself off as 'Big Budget' which had previously established
a national reputation (good will).
D) All of the above.
Answer: C