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Author: salbonito Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 18386  
Subject: Q: Finding Debt Date: 7/13/2003 9:46 PM
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In determining the cash to debt ratio from the balance sheet, I understand how to find cash - what I'm not as sure about is how to find debt. I understand that one needs to treat the following as debt when calculating this ratio: Notes Payable, Current Long Term Debt, Convertible Debt (whatever that is,) Long Term Debt, and Preferred Stock.

Is there anything else I should include as debt?

Specifically, is Accounts Payable considered debt for this purpose?

Thanks much.

Sal
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Author: jat4 Big gold star, 5000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18355 of 18386
Subject: Re: Q: Finding Debt Date: 7/13/2003 11:24 PM
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http://www.fool.com/portfolios/RuleMaker/1999/RuleMaker990804.htm









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Author: madmarv Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18356 of 18386
Subject: Re: Q: Finding Debt Date: 7/15/2003 3:00 AM
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Notes Payable, Current Long Term Debt, Convertible Debt (whatever that is,) Long Term Debt, and Preferred Stock.

Is there anything else I should include as debt?


Lines of credit, commercial paper, capitalized leases, and bonds.

Convertible debt is like ordinary bonds except that they can be converted into common stock and the terms (when conversion is first possible and at what rate) vary.

Specifically, is Accounts Payable considered debt for this purpose?

No, debt is something that requires an interest payment. Accounts Payable do not charge interest.

Marv

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Author: elann Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18357 of 18386
Subject: Re: Q: Finding Debt Date: 7/15/2003 12:45 PM
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Specifically, is Accounts Payable considered debt for this purpose?

No, debt is something that requires an interest payment. Accounts Payable do not charge interest.


Huh? Debt is anything you owe. An obligation. Accounts Payable are certainly debt. They happen to be short term debt.

Elan


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Author: CashPhlo Three stars, 500 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18358 of 18386
Subject: Re: Q: Finding Debt Date: 7/15/2003 1:48 PM
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Huh? Debt is anything you owe. An obligation. Accounts Payable are certainly debt. They happen to be short term debt.

That is not right. A liability is anything you owe. Accounts Payable is a liability, not short-term debt. Debt is a liability that does incur interest.

Here's an example:

http://moneycentral.msn.com/investor/invsub/results/statemnt.asp?Symbol=ko&lstStatement=Balance&stmtView=Ann

CashPhlo

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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18359 of 18386
Subject: Re: Q: Finding Debt Date: 7/17/2003 9:03 PM
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A liability is anything you owe. Accounts Payable is a liability, not short-term debt. Debt is a liability that does incur interest.

So, let me take a ridiculous extreme.

If I charge something to my Visa card it is a liability for up to around 30 days. But if I do not pay all of it, the unpaid part starts running up interest and service charges. So now it is debt. Right?

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Author: madmarv Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18360 of 18386
Subject: Re: Q: Finding Debt Date: 7/18/2003 4:28 AM
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If I charge something to my Visa card it is a liability for up to around 30 days. But if I do not pay all of it, the unpaid part starts running up interest and service charges. So now it is debt. Right?

Your Visa card is not a payable, it is a line of credit regardless of how you use it. The fact that it has a grace period doesn't change its nature. A/P is interest free credit extended by one company to another.

Marv

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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18361 of 18386
Subject: Re: Q: Finding Debt Date: 7/18/2003 10:14 AM
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Your Visa card is not a payable, it is a line of credit regardless of how you use it. The fact that it has a grace period doesn't change its nature. A/P is interest free credit extended by one company to another.

Well, if instead of being just me, I am North American Veeblefetzer Corporation and I buy a 1000 Xeon CPU chips from Intel, and I am favorably rated in D&B so they extend me credit, then that is a liability but not a debt, because they are not charging me interest.

But what is the distinction between Intel extending N.A.V.Corp the credit directly and having Visa do it instead? Because, if I understand you, if Intel extends the credit directly it is A/P and not debt, but if there is a middleman it is debt.

Now time goes by and I do not pay Intel. So they start sending me reminders, and eventually will they not start charging interest and possibly fees? If they do, is it not now a debt (though possibly not long term unless Intel are more patient than I imagine they are). And if this goes on over a year, is it not (original amount + interest and fees) now a long term debt?

Eventually they call in the lawyers and sue me, of course. And those expenses are something else.

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Author: elann Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18362 of 18386
Subject: Re: Q: Finding Debt Date: 7/18/2003 12:07 PM
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Your Visa card is not a payable, it is a line of credit regardless of how you use it. The fact that it has a grace period doesn't change its nature. A/P is interest free credit extended by one company to another.

You're piling one error on top of another.

VISA puts a limit on the amount you can borrow using your credit card. You may view that as a line of credit. The amount you actually borrow on your credit card, i.e. your monthly statement balance, is debt. Even by your incorrect definition, since credit card balances carry interest (and how!) they are debt.

Now let's go back to the definition of debt. From the American Heritage Dictionary -
debt n. - 1. Something owed, such as money, goods, or service. 2. An obligation or liability to pay or render something to someone else.

Nowhere is interest mentioned as an element in the definition of debt.

Let's look at another example. You owe a friend some money to buy a car, and you write a formal note recording that obligation, but you agree not to charge your friend interest. Is that a debt? Of course it is.

When looking at financial statements there are some naming conventions. So accounts payable have aunique name to help us all understand what we're talking about. It doesn't mean they are not a debt.

Elan


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Author: madmarv Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18363 of 18386
Subject: Re: Q: Finding Debt Date: 7/18/2003 12:08 PM
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But what is the distinction between Intel extending N.A.V.Corp the credit directly and having Visa do it instead? Because, if I understand you, if Intel extends the credit directly it is A/P and not debt, but if there is a middleman it is debt.

No, you're still ignoring the key difference between A/P and debt. The "middleman" is irrelavant, INTC could offer financing w/ or w/o interest and depending which it is determines whether NAV lists the liability as debt or A/P.

And if this goes on over a year, is it not (original amount + interest and fees) now a long term debt?

No, the difference between long term vs. short term liabilities is the timespan over which they are due not the age of the liability. The fact that you're delinquent, doesn't move the liability from short to long term.

Marv

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Author: madmarv Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18364 of 18386
Subject: Re: Q: Finding Debt Date: 7/19/2003 6:38 AM
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VISA puts a limit on the amount you can borrow using your credit card. You may view that as a line of credit. The amount you actually borrow on your credit card, i.e. your monthly statement balance, is debt. Even by your incorrect definition, since credit card balances carry interest (and how!) they are debt.

You're reading my post wrong. I said the the Visa card was not A/P, therefore it is debt.

When looking at financial statements there are some naming conventions. So accounts payable have aunique name to help us all understand what we're talking about. It doesn't mean they are not a debt.

A/P and debt are separate line items and though you may think of A/P as debt, it is not for the purposes of creating and reading financial statements. If A/P were merely a special name for debt it would be listed as a subset under debt on the Balance Sheet (or A/P would not be listed at all) and changes in A/P would be shown in the Financing Activites section of the Cash Flow Statement. In reality, A/P is listed independantly of debt on the Balance Sheet and as A/P is a part of working capital, it is shown in the Operating Activities section.

Marv

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Author: elann Big gold star, 5000 posts Top Favorite Fools Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18365 of 18386
Subject: Re: Q: Finding Debt Date: 7/19/2003 4:21 PM
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When looking at financial statements there are some naming conventions. So accounts payable have aunique name to help us all understand what we're talking about. It doesn't mean they are not a debt.
=======================
A/P and debt are separate line items and though you may think of A/P as debt, it is not for the purposes of creating and reading financial statements. If A/P were merely a special name for debt it would be listed as a subset under debt on the Balance Sheet (or A/P would not be listed at all) and changes in A/P would be shown in the Financing Activites section of the Cash Flow Statement. In reality, A/P is listed independantly of debt on the Balance Sheet and as A/P is a part of working capital, it is shown in the Operating Activities section.


You wrote several times that an obligation which carries no interest, such as A/P, is not debt. That is wrong. Any obligation, including A/P, is debt. There are different kinds of debts, and A/P is one of them. Everything listed on the liabilities side of a balance sheet, except for equity, is debt. Of course, different kinds of debt have different names, some specific like A/P, and some more generic like 'long term debt' or 'short term debt'.

Elan

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Author: LostInThought Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18366 of 18386
Subject: Re: Q: Finding Debt Date: 7/19/2003 8:05 PM
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The problem is that a word can have several meanings, depending upon context.

Yes, in ordinary conversation, debt means any money that you owe.

However, as has been pointed out, when you are discussing company finances, debt means a liability that has an interest factor built in.

Forget about semantics, let's stick to the original question- when it comes to the cash to debt ratio from the balance sheet, the debt portion is interest-bearing.

Is there anything else I should include as debt?, the answer is anything that carries interest.

Specifically, is Accounts Payable considered debt for this purpose?, the answer is no.

Lost

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Author: 1000 Big funky green star, 20000 posts Top Recommended Fools Feste Award Nominee! Coverage Fool Supernova Phoenix 1
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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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Author: JeanDavid Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18368 of 18386
Subject: Re: Q: Finding Debt Date: 7/20/2003 7:50 AM
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Specifically, is Accounts Payable considered debt for this purpose?, the answer is no.

But if you let them go for 10 days or so, you forfeit a 2% to 10% discount, and may start incurring interest and service charges after 30. I worked for a large outfit that could get away with it, so they tended to let their A/P go 90 days or more and made money on the difference that more than covered the interest and charges (they are not succeeding at that anymore and I would no longer touch their stock with any of my money). But before that, I worked for a small outfit and they paid within 10 days.

So should not A/P be divided into two pieces? Non-debt: which forfeits no discounts, pays no interest and service charges. Debt: which has forfeited discounts, pays service charges and interest.

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Author: StringCheeseMark Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 18369 of 18386
Subject: Re: Q: Finding Debt Date: 7/29/2003 12:58 AM
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Now let's go back to the definition of debt. From the American Heritage Dictionary -
debt n. - 1. Something owed, such as money, goods, or service. 2. An obligation or liability to pay or render something to someone else.


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I don't recall the american heritage dictionary as the standard for accounting practice.

Accounts payable is not debt but is a liability.

Personal finance example: I renew my subscription to business week. I send in a card extending my subscription two more years at the cost of $40. I now have a $40 increase in accounts payable. A month later I receive the bill for the subscription and put it on my visa which carries 8% interest. My accounts payable decreases by $40 and my short term debt increases by the same.

What on earth is so tough to understand about that?

scm

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