I only heard the punchline to this conversation so I don't know how it started.  Suffice it to say, we probably need to not only explain to our children that there ARE words that are inappropriate for them to say and maybe go one step further and tell them WHICH words are inappropriate for them to say.

The KingofHearts: "The Dormouse is a smart ass."

Caterpillar: "Yeah, Sister is a bleep-ass."

KoH: "You bleeped the wrong word, numbskull."