Banks and other financial institutions provide
loans or credit to buyers for purchases of vari-
ous items. Using credit is probably as old as
commerce itself. The Babylonians were lending
money as early as 1300 B.C. The use of credit
provides individuals convenience and buying
power. Credit cards provide individuals con-
venience by supporting Internet purchases,
helping them avoid the hassles of checks or
cash, and consolidating payments to a single
credit card company. Credit also creates pur-
chasing power by allowing individuals to pur-
chase fixed assets, such as automobiles and
houses, prior to having money for the total pur-
chase price. Just imagine if you had to save the
complete purchase price of a home prior to pur-
chase. Most of us would only be able to buy a
house by the time our families were already
grown and gone. Thus, credit allows us to pur-
chase assets whose benefits are consumed in
the long term, such as houses and cars.
Like individuals, the use of debt can help a
business reach its business objectives. For ex-
ample,Barnes & Noble, Inc., a major media su-
perstore in the United States, uses short-term
credit to purchase books, music, and DVDs from
publishers and studios. As these items are sold,
cash is generated to pay the suppliers for these
purchases. In addition, Barnes & Noble uses
long-term debt to expand its business. As a re-
sult of Barnes & Noble’s use of credit, it has be-
come the No. 1 retail brand for quality, sold
over 500 million books annually, become the
second largest coffee house chain in the United
States, and built a network of over 820 stores.
While debt can help a company achieve the
kind of success that Barnes & Noble has, too much
debt can be a financial burden that can even lead
to bankruptcy. Just like individuals, businesses
must manage debt wisely. In this chapter, we will
discuss the nature of, accounting for, and analy-
sis of both current and long-term debt.Barnes & Noble, Inc.
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