Response to Coments on DQ1 Smith and DQ2 Smith,WK2 - Essay Example

DQ1 I would not consider liabilities a bad thing. Companies are able to grow as they mature due to the fact that these firms finance a portion of their growth through the acquisition of debt. When companies become publicly traded enterprises they have more access to debt instruments. A form of corporate debt that is sold in the money markets is corporate bonds. During the early stages of a company it becomes hard to obtain credit. It normally takes three years of operations obtaining a positive income for companies to qualify for credit.

A way to determine whether the debt balance of a company is bad is by calculating the debt ratio and the current ratio. The debt ratio shows the ability of a company to pay off its long term debt, while the current ratio demonstrates the ability of a firm to pay off its short term debt. DQ2 The use of cash based accounting is more suitable for small operations that are highly dependent on the short term income to stay in business. An example would be a hot dog vendor. The hot dog vender uses the weekly sales to purchase more material to operate the next week.

The hot dog vendor collects all his sales in cash. The majority of public corporations use accrued based accounting because they deal with large sums of money and numerous transactions. The existence of credit does not work in accounting unless the firm used an accrued based accounting system. In cash based accounting credit is not existent. Despite the differences between cash based accounting and accrued based accounting the application of both systems will lead to the same accounting results.

For example if the net income of a company is $10,000 under cash based accounting the use of accrued based accounting will also give a net profit of $10,000.