Chapter 7 Mathematics of Buying Section 3 Cash Discounts: Ordinary Dating Methods

Calculate Net Cost After Discounts Cash discounts offered to encourage prompt payment by customers “Pay me quickly and receive a discount.” Businesses often borrow money for day-to-day operations. Immediate cash payments decrease need for borrowed money

Finding the Net Cost Net Cost = (List price – Trade discount) – Cash discount

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Use the Ordinary Dating Method Ordinary dating method expressed on an invoice as: 2/10, n/30 or 2/10, net 30 Read as “two ten, net thirty” 2% discount applies if paid within 10 days Full invoice must be paid within 30 days If not, a penalty may apply

To Find the Due Date of an Invoice Use the number of days given in the chart 30-Day Months 31-Day Months Exception April January, March February June May, July (28 days, September August 29 in a November October leap year) December

To Find the Due Date of an Invoice Knuckle Method

Determine Whether Cash Discounts Are Earned Find the date due by counting from the next day after the date of the invoice Add the given number of days to the starting date

Determine Whether Cash Discounts Are Earned When discount date or net payment date falls in the next month: Subtract the invoice date from the number of days in the month Subtract that result from the total number of days given to pay That result is due date in the next month

Example A Hershey invoice is dated January 2 and offers terms of 2/10, net 30. Find (a) the last date on which the 2% discount may be taken Beginning with the invoice date, January 2, the last date for taking the discount is January 12 (2 + 10). (b) the net payment date. February 1, (31 – 2 = 29 days remaining in January plus 1 day in February.)

Example An invoice received by Target for $760 is dated May 1 and offers terms of 2/10, n/30. If the invoice is paid on May 4 and the shipping and insurance charges, which were FOB shipping point, are $28.50, find the total amount due. Since the invoice was paid in 3 days (4 – 1 = 3), which is less than the 10-day requirement identified by 2/10, the 2% cash discount applies.

Example Cash discount = 2% of $760 = $15.20 Amount due = invoice amt – Cash discount = $760 – $15.20 = $744.80 The shipping and insurance charges must be added to the amount due. Total = Amount due + Shipping and Insurance = $744.80 + $28.50 The total amount due is $744.80

Use Postdating When Calculating Cash Discounts Invoice may be postdated Gives purchaser more time to take the cash discount May fit accounting practices of seller Seller uses date that is after actual invoice date, labels it AS OF

Example An invoice from Apple Electronics is dated July 20 and offers terms of 3/10, 2/20, 1/30, n/40. Find (a) the three final dates for each cash discount 3% if paid by July 30 (10 days, July 20) 2% if paid by August 9 (20 days, July 20) 1% if paid by August 19 (30 days, July 20) (b) the net payment date The net payment date is August 29 (10 days beyond the cash discount period).