Critical Thinking Questions and Exercises

1. What does it mean to borrow money on a discount basis?

2. What does it mean to be concerned that an entity's liabilities are not understated?

3. Explain what financial leverage is and how it is provided by long-term debt.

4. Describe the different characteristics of a bond, which is the formal document representing most long-term debt.

5. What does it mean when a company has a deferred tax liability?

6. Describe the characteristics of common stock and preferred stock.

7. Describe what stock dividends and stock splits are and discuss why each is used.

8. Assume that you own 1,500 shares of $10 par value common stock and the company has a 5-for-1 stock split when the market price per share is $30. How many shares of common stock will you own after the stock split?

9. Explain what treasury stock is, why it is acquired, and how treasury stock transactions affect stockholders' equity.

10. Explain what noncontrolling interest is, why it arises, and what it means in the balance sheet.