Accounting Chapter 7: Discounts Flashcards

Questions and Answers

What is a trade discount?

The full selling price of an item.

A discount offered for cash payments.

A reduction off the original selling price not related to early payment. (correct)

A discount given for bulk purchases.

What is a cash discount?

The result of an early payment based on the terms of sale.

What is the list price?

Suggested retail price paid by customers.

How is the trade discount amount calculated?

List Price x Trade Discount Rate. Signup and view all the answers

What is an invoice?

Document recording purchase and sales transactions. Signup and view all the answers

What does the trade discount rate represent?

A percent off the list price that retailers can deduct. Signup and view all the answers

What is net price?

Price that the retailer pays the manufacturer or wholesaler. Signup and view all the answers

What are freight terms?

Determine how freight will be paid. Signup and view all the answers

What does FOB shipping point mean?

Buyer pays cost of freight in getting goods to his location. Signup and view all the answers

What does FOB destination mean?

Seller pays cost of freight in getting goods to buyer's location. Signup and view all the answers

What is a single trade discount?

Company gives only one trade discount. Signup and view all the answers

What is the complement?

Difference between the discount rate and 100%. Signup and view all the answers

What are series/chain discounts?

Trade discounts in a series of 2 or more successive discounts. Signup and view all the answers

What is the net price equivalent rate?

When multiplied times the list price, produces the actual cost to the buyer. Signup and view all the answers

What is the single equivalent discount rate?

Rate that calculates the amount of the trade discount by multiplying the rate times the list price. Signup and view all the answers

What are terms of sale?

Criteria on invoice showing when cash discounts are available. Signup and view all the answers

What is a credit period?

Credit days counted from the date of invoice. Signup and view all the answers

What is a discount period?

Amount of time to take advantage of a cash discount. Signup and view all the answers

What are due dates?

Maturity date, or when the note will be repaid. Signup and view all the answers

What is the end of credit period?

Last day from the date of invoice when a customer can take a cash discount. Signup and view all the answers

What is ordinary dating?

Cash discount is available within the discount period. Signup and view all the answers

What is receipt of goods (ROG)?

Used in calculating the cash discount period; begins the day the goods are received. Signup and view all the answers

What is end of month (EOM)?

Cash discount period begins at the end of the month invoice is dated. Signup and view all the answers

What is the trade discount amount formula?

List Price x Trade Discount Rate. Signup and view all the answers

What is the net price formula?

List Price - Trade Discount Amount OR List Price x Complement of Trade Discount Rate. Signup and view all the answers

What is the list price formula?

Net Price / Complement of Trade Discount Rate. Signup and view all the answers

Study Notes

Discounts Overview

Trade Discount: A reduction from the list price, not associated with early payment.
Cash Discount: Offered when payments are made early, specified in sale terms.

Pricing and Discount Calculations

List Price: The retail price suggested for customers.
Trade Discount Amount: Discount received by retailers, calculated as List Price x Trade Discount Rate.
Net Price: Final price after trade discount; calculated using List Price - Trade Discount Amount.

Documents and Payment Terms

Invoice: A document that records sales and purchase transactions.
Freight Terms: Outline how shipping costs are handled; main types include FOB shipping point and FOB destination.
FOB Shipping Point: Buyer bears freight costs.
FOB Destination: Seller covers freight costs.

Discount Structures

Single Trade Discount: Only one discount offered by a company.
Complement: Difference between the discount rate and 100%, i.e., 100% - Trade Discount Rate.
Series/Chain Discount: Two or more successive trade discounts.

Equivalent Rates

Net Price Equivalent Rate: Factor reflecting actual buyer costs, calculated by multiplying the complements of all discount rates.
Single Equivalent Discount Rate: A single percentage discount representing multiple chain discounts, calculated as 1 - Net Price Equivalent Rate.

Terms and Periods

Terms of Sale: Criteria on invoices regarding cash discounts, including rates and periods.
Credit Period: Days counted from invoice date, unrelated to discount periods.
Discount Period: Duration allowed to take advantage of cash discounts.
Due Dates: Date when payment or note repayment is due.
End of Credit Period: Final day for customers to utilize cash discounts.
Ordinary Dating: Cash discounts valid within discount period; total due at end of credit period if missed.

Special Dates

Receipt of Goods (ROG): Marks the start of the cash discount calculation period, beginning on the day goods are received.
End of Month (EOM): Cash discount period initiates at the month's end; if after the 25th, provides an additional month.

Formulas

Trade Discount Amount Formula: List Price x Trade Discount Rate.
Net Price Formula: List Price - Trade Discount Amount or List Price x Complement of Trade Discount Rate.
List Price Formula: Net Price / Complement of Trade Discount Rate.

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Description

Test your knowledge on trade and cash discounts with these flashcards from Accounting Chapter 7. Each card provides definitions for key terms like list price and trade discount amount. Enhance your understanding of pricing strategies in business.