1	PRINCIPLES OF ACCOUNTING Cash Discounts
2	“Cash Discount” is Misleading “Cash Discount” originally meant a discount for paying with cash But today businesses pay bills with checks or electronic funds transfers So “Cash Discount” has evolved into a discount for early payment
3	Computing Cash Discounts Cash Discounts are expressed as: %/days,N/days “%” is the cash discount percentage “days” is the number of days during which a customer can take the cash discount “N/Days” is the deadline for paying the invoice total
4	Cash Discount Example Terms of 2/10,N/30 means that a customer may take a 2% discount on payments made within 10 days of the invoice date If customers do not take the cash discount, they still have up to 30 days to pay the Net invoice total After 30 days, customers owe late fees
5	Cash Discount Example On July 1^st the firm billed a customer for a $10,000 invoice with terms of 2/10,N/30 Customer paid on July 10^th (within the cash discount period of 10 days from July 1^st) Cash Discount was 2% of $10,000 = $200 Payment amount equaled $9,800 ($10,000 less $200 cash discount) But if the customer paid after July 11^th, they would owe the full amount of $10,000 Payments after July 31^st (30 days later) would also be subject to late fees
6	Cash Discount Exercise
7	Correct! The customer paid within the 10 day discount period (March 19^th is only 9 days after the March 10^th invoice date) Cash Discount is 1% of $30,000 = $300 $30,000 less $300 = $29,700
8	Reasons for Cash Discount Sellers offer cash discounts to collect receivables more quickly Faster collections reduce bad debts Also sellers can pay their own debts faster, which saves interest costs
9	Why customers take advantage of cash discounts Discount periods are typically 10 days and the “net period” is usually 30 days So customers have to pay 20 days early (30-10) to claim the discount 365 days/20 days equals about 18 periods so they can take cash discounts about 18 times per year So even a 1% cash discount offers an annual return of more than 18% (which is a very high return for a risk-free investment)
10	Freight Costs Freight costs are NOT subject to cash discounts So if an invoice of $4,000 had payment terms of 2/10,N/30 including freight charges of $300 The cash discount would only apply to $3,700 ($4,000 invoice - $300 freight) Cash discount = $74 (2% of $3,700) Payment within cash discount terms = $3,926 ($4,000 invoice total - $74 cash discount)
11	Common Freight Carriers Some sellers use their own trucks to deliver merchandise But many firms hire a trucking or a shipping company to make deliveries Companies in the business of shipping goods for other firms are known as “common freight carriers” UPS and FedEx are common carriers
12	Freight Collect Occasionally goods are shipped with terms of “FOB Destination with Freight Collect” This occurs because the shipper does not always know in advance the exact amount that a common carrier will charge for freight Then the customer pays the common carrier’s charges, and deducts the freight costs from the amount of the seller’s invoice So invoice terms use the words “net invoice” because freight costs are subtracted (netted) from the invoice total
13	Example of Freight Collect Seller sent an invoice for $8,000 with terms of FOB Destination with Freight Collect The common carrier charged $400 to deliver the shipment The customer paid the common carrier’s freight bill for $400 and paid $7,600 to the seller ($8,000 less the $400 freight costs)