LO 6.1 What do credit terms of 4/10, n/30 mean in regard to a purchase?  3LO 6.1 What is the difference between a sales return and a sales allowance?  4LO 6.1 If a retailer made a purchase in the amount of $350 with credit terms of 2/15, n/60. What would the retailer pay in cash if they received the discount?  5LO 6.2 What are two advantages and disadvantages of the perpetual inventory system?  6.LO 6.2 What are two advantages and disadvantages of the periodic inventory system?
LO 6.1 What do credit terms of 4/10, n/30 mean in regard to a purchase?
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3LO 6.1 What is the difference between a sales return and a sales allowance?
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4LO 6.1 If a retailer made a purchase in the amount of $350 with credit terms of 2/15, n/60. What would the retailer pay in cash if they received the discount?
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5LO 6.2 What are two advantages and disadvantages of the perpetual inventory system?
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6.LO 6.2 What are two advantages and disadvantages of the periodic inventory system?
The Correct Answer and Explanation is :
1. Credit terms of 4/10, n/30 in regard to a purchase:
Credit terms of 4/10, n/30 mean that the buyer is eligible for a 4% discount if the invoice is paid within 10 days. However, the full invoice amount is due within 30 days if the discount is not taken. For example, if the purchase amount is $1,000, the buyer can pay $960 if the payment is made within 10 days. If not paid within this period, the buyer must pay the full $1,000 within 30 days.
2. Difference between a sales return and a sales allowance:
A sales return occurs when a customer returns goods to the seller due to defects, dissatisfaction, or other reasons. The customer is usually refunded the full price paid for the returned goods. A sales allowance, on the other hand, is a reduction in the price of goods that the customer agrees to keep after discovering defects or other issues. The customer does not return the goods but accepts the reduced price as a form of compensation.
3. Calculation of payment with credit terms of 2/15, n/60:
For a purchase of $350 with credit terms of 2/15, n/60, the retailer receives a 2% discount if the invoice is paid within 15 days. To calculate the cash payment if the retailer receives the discount, we multiply the purchase price by 2% and subtract the result from the original purchase price:
[ \text{Discount} = 350 \times 0.02 = 7 ]
The retailer would pay:
[ 350 – 7 = 343 ]
Thus, the retailer would pay $343 if they receive the discount.
4. Two advantages and disadvantages of the perpetual inventory system:
Advantages:
- Real-time tracking: The perpetual inventory system continuously updates inventory records with every sale or purchase, providing accurate real-time data about stock levels.
- Improved decision-making: With up-to-date inventory information, businesses can make better purchasing and sales decisions, reducing stockouts and overstocking.
Disadvantages:
- Cost and complexity: The system requires sophisticated technology and resources to implement, which can be costly and complex, particularly for smaller businesses.
- Data errors: Due to the need for constant tracking, human errors or system malfunctions can lead to incorrect inventory data, which may require frequent audits.
5. Two advantages and disadvantages of the periodic inventory system:
Advantages:
- Lower cost: The periodic inventory system is simpler and more cost-effective, as it does not require sophisticated tracking or technology.
- Simplicity: It is easier to manage for small businesses or those with a limited product range, as it only requires inventory counts at specific intervals.
Disadvantages:
- Less accurate data: Inventory data is only updated periodically, which can lead to inaccuracies and poor decision-making if stock levels fluctuate between counts.
- Risk of stockouts or overstocking: Since businesses do not have real-time data, they may face unexpected shortages or excess inventory, potentially affecting sales and profitability.