Responses to DQ1Selling ReceivableDW and DQ2 Use of Depreciation CH - Essay Example

DQ1 I agree with you that the selling of account receivables is a strategy that is used by companies to improve the liquidity position of the firm. A way to determine if a company is having liquidity problems is to perform ratio analysis. A ratio that shows the liquidity position of the company as far as the ability of the firm to pay off its short term debt is the current ratio (Besley & Brigham, 2000). The company that buys the receivables does so in order to gain a profit. Companies that buy receivables have to be careful as far as not overpaying for the receivables due to the fact that some of the receivables purchased will go into default.

A way to determine the risks associated with the receivables purchased is to perform an account receivables aging schedule. The mechanism of factoring is a good way for companies to improve their liquidity and cash position. DQ2 Your premise that depreciation is a technique that is used to devalue an asset instead of being a method for asset valuation is completely correct. When I first read the message of the president of Keene Company I thought, “Where did this guy go to business school”.

The premise the person stated is illogical. The person is mixing accounting concepts. Depreciation only has one purpose which is to devalue an asset through the passage of time. As you stated in your response book value and market values are different. There are different methods of depreciation that can be used by an accountant. Four depreciation methods are declining balance, sum of year digits, straight line, and the modified accelerated cost recovery system (MACRS) (Fixedassetssoftware, 2011).

The MACRS method is an accelerated depreciation method that is used of assets that lose value fast such as computers. References Besley, S., Brigham, E. (2000). Essentials of Managerial Finance (12th ed.). Fort Worth: The Dryden Press. Fixedassetssoftware.com (2011). Depreciation Methods. Paragon Systems. Retrieved May 10, 2011 from http://www.fixedassetsoftware.com/depreciation_methods.html