Terms and Definitions

A merchandiser buys and resells items, termed merchandise. Wal-Mart is an example of a merchandiser. Revenue from the sales of merchandise is called Sales. The expense associated with the sale of merchandise is called Cost of Merchandise Sold. The merchandise that is on hand at the end of an accounting period is called Merchandise Inventory.

The terms of sale are often indicated on the invoice that the seller sends to the buyer. The terms of payment are called credit terms, and the seller may offer a if payment is made within a specified time period, called the credit period. It is often to a customers advantage to pay within the credit period. It is also to the sellers advantage to extend credit terms to accelerate the collection of accounts receivable. Examples of credit terms:

Credit Term	Credit Term Abbreviation
Net in 30 days	n/30
Net end of month	n/eom
2% discount in 10 days, net in 30 days	2/10, n/30

A customer may decide to return an item. Such returns are termed purchase returns and allowances and are initiated with a credit memo. Subtracting sales discounts and sales returns and allowances from sales yields net sales.

Understanding the Business Transaction

Feb. 5, 2014 (sale on account)	Customers can purchase items for cash or on account. A sale made on account is recorded as an accounts receivable. Conrad Sales sells office equipment to Horizon Enterprises on account for $1,100, terms 2/10, n/30. The cost of merchandise sold is $950.
Feb. 10, 2014 (sales return)	Conrad Sales issues a credit memo in the amount of $500 for returned items. The cost of returned items is $370.
Feb. 15, 2014 (sales discount)	Conrad Sales receives the amount due from the Feb. 5 sale less the returned item on Feb. 10.

Recording in the Accounting System

Journalize the February sales transactions for Conrad Sales. For compound entries, if an amount box does not require an entry, enter "0".

Feb. 5
Feb. 10
Feb. 15

Financial Statement Impact

Gifford Sales does not presently offer a sales discount. Gifford is considering a discount policy in order to accelerate customer collections. In order to determine the impact of the discount on selected monthly income statement items, various discount terms are assumed. Gifford assumes total sales of $100,000 subject to the discount with an associated cost of merchandise sold of $55,000 for January, 2014. Gifford further assumes that the percent of sales that will take the discount, shown on the row just below the slider, will increase as the discount increases, as follows:

Click here and use the sliders to answer the following questions using the sales discount slider and income statement information.

1.	What is the estimated gross profit when the sales discount is .5% for January?
	$

2.	How much will net sales be expected to decline for a sales discount of 2% relative to no sales discount?
	$

3.	Why is the sales discount of 2% more than twice the sales discount at 1%?

4.	What is the sales discount amount for January if the sales discount term is 1%?
	$

5.	Why does the percentage of customers taking the discount increase with the discount? Select the correct relationship from the following statement:
	As the discount increases the value of the discount to the customer relative to the value of delaying payment on accounts receivable.

6.	Is cost of merchandise sold impacted by the sales discount assumption?

7.	Are sales impacted by the sales discount assumption?