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Subject: Re: Q: Finding Debt Date: 7/20/2003 12:02 AM
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Hi JeanDavid,

When you buy something on credit, you could call that a debt. So in that regard you are correct.

But when reading financial statements, debt is only liabilities that charge an interest fee. We can say that this is a rule.

This is an important difference because liabilities which might include many types of expenses which must be paid, but do not charge an interest fee. The type of items that are considered debt on financial statements are called debt because they charge interest. This is worse than financial statement liabilities because the interest reduces profit margins. And if sales drop can cause severe problems for the company.

In bad times a company can reduce liabilities, but debt once accumulated must be paid off. Interest payments on debt reduces profit margins when sales also drop off, it can be a real problem to companies. Companies go bankrupt when debt is high because this is far more difficult to control than expenses that can be reduced by laying off employees and by other means.

This is why finacial statements make the distintion between debt and liabilities. Debt is always a liability but liabilities are not always debt. Both liabilities and debt are owed. Both are true expenses, but one can be controlled and the other must be payed off. If revenues drop,debt must still be paid with its harmful interest payments while many liabilities can be reduced by cutting expenses.

I hope this helps a bit.

tom
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