Accounting Chapter 7: Discounts Flashcards

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.

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.