purchase discount

Examples of purchase discount in the following topics:

• Recording Purchases

  • For an example of a purchase discount, a purchaser who buys a 100 dollar item with a purchase discount term 3/10, net 30 only needs to pay 97 dollars as long as he or she pays within 10 days.
  • Purchases are offset by Purchase Discounts, and also Purchase Returns and Allowances.
  • A purchase discount is an offer, from the supplier to the purchaser, to reduce the selling price if payment is made within a certain period of time.
  • For example, a purchaser buying a 100 dollar item with a purchase discount term of 3/10, net 30, will only need to pay 97 dollars if they pay within ten days.
  • Under the net method, purchase discounts are realized right away.

• Trade vs. Consumer Promotions

  • Trade allowances are incentives used to encourage a retailer to stock a product such as cash discounts or promotional incentives.
  • Discounts are reductions to a basic price of goods or services.
  • Discounts are sometimes given to customers who buy in large quantities.
  • Kids eat free promotions offer a discount on the total dining bill by offering one free kid's meal with each regular meal purchased.
  • A point of purchase or end cap display can make consumers aware of new products.

• Discounting

  • Quantity discounts are reductions in base price given as the result of a buyer purchasing some predetermined quantity of merchandise.
  • A noncumulative quantity discount applies to each purchase and is intended to encourage buyers to make larger purchases.
  • The buyer adds to the potential discount with each additional purchase.
  • Such a policy helps to build repeat purchases.
  • Discounts, such as 75% off, are used to draw customers to purchase items.

• Trade Allowances

  • Trade discounts are often combined to include a series of functions, for example 20/12/5 could indicate a 20% discount for warehousing the product, an additional 12% discount for shipping the product, and an additional 5% discount for keeping the shelves stocked with the product.
  • The larger the purchase, the larger the discount.
  • For example, a pharmacist might offer a discount for over-the-counter drugs to physicians who are purchasing them for dispensing to the physicians' own patients.
  • Other trade sales promotion methods include trade contests, which are contests that reward retailers that sell the most products, and point-of-purchase displays, which are used to create the urge of "impulse" buying.
  • Hairdressers can go to the manufacturer to get a discount for buying in bulk.

• The Creation of the Federal Reserve

  • The Fed has three main policy tools: setting reserve requirements, operating the discount window and other credit facilities, and conducting open-market operations.
  • The Fed extends these loans through the discount window and charges what is called the discount rate.
  • The discount rate is set by the Fed, and is important because it radiates throughout the economy: if it becomes more expensive to borrow at the discount window, interest rates will rise and borrowing will become more expensive economy-wide.
  • In this way, the Fed can use the discount window to affect interest rates and the money supply .
  • The diagram shows how the central bank can increase the money supply by lending money through the discount window or purchasing bonds (open market operations).

• Calculating the NPV

  • Cash inflows (such as coupon payments or the repayment of principal on a bond) have a positive sign while cash outflows (such as the money used to purchase the investment) have a negative sign.
  • When a new piece of machinery is purchased, for example, the investor (the purchasing company) has to estimate the size and occurrence of maintenance costs as well as the size and occurrence of the revenues generated by the machine.
  • The other integral input variable for calculating NPV is the discount rate.
  • There are many methods for calculating the appropriate discount rate.
  • Since many people believe that it is appropriate to use higher discount rates to adjust for risk or other factors, they may choose to use a variable discount rate.

• Discount Policy

  • Fed's second monetary policy tool is the discount policy.
  • For example, the Fed raises the discount rate.
  • The FDIC purchased 80% of the bank's stock and elected new management.
  • Banks can abuse the discount window.
  • For example, the Fed raises the discount rate.

• Recording Sales

  • Net sales are gross sales minus sales returns, sales allowances, and sales discounts.
  • 2/10, n/30 (2% discount if paid within 10 days, net invoice total due in 30 days).
  • Sales - Sales Return & Allowances - Sales Discount = Net sales
  • In a marketing, advertising, or a general business context, the term "sales" often refers to a contract in which a buyer has agreed to purchase products at a set time in the future.
  • A discount from list price might be noted if it applies to the sale.

• Terms of Trade

  • Terms of trade credit include the amount of time allowable for payment to be received, including any potential discounts.
  • Transit time is included when counting the days, i.e. a purchase in transit for 7 days before receipt has just 23 additional days until payment is due to the seller.
  • The debtor is free to pay before the due date, and some businesses offer a discount for early payment.
  • A discount can be offered and stated as "2/10, net 30".
  • The operator may sign a franchising agreement, under which the distributor agrees to provide ice cream stock under the terms "Net 60" with a ten percent discount on payment within 30 days, and a 20% discount on payment within 10 days.

• Yield to Maturity and Rate of Return

  • Investors who purchased a financial security know the face value, the maturity date, number of interest payments per year, and the amount of interest payments.However, investors do not know the discount rate.They can substitute the information into the present value formula and solve for the discount rate.Then investors can calculate the discount rate for several different bonds and select the bond that has the highest discount rate.
  • If investors hold the bond until maturity, then we call the discount rate the yield to maturity.Economists consider yield to maturity the most accurate measure of the interest rates because the yield to maturity allows investors to compare different bonds.For example, you want to buy a coupon bond today for a market price of $1,600.Bond pays $400 interest per year and matures in three years.Finally, the bond pays $1,000 on the maturity date.Consequently, we calculate your yield to maturity of 14.11% in Equation 6.You can compare this yield toother investments and choose the investment with the greatest yield.
  • As you can see, this calculation becomes very complicated.If you calculate the discount rate manually, then you must calculate the PV0 by selecting various discount rates, such as 0%, 5%, 10%, and 20%.Next, you insert your particular discount rate, r, into the Equation 7, and select the discount rate that has a present value, PV0 close to $1,600.Mathematicians wrote programs that can solve for the discount rate.If you visit the author's website, www.kenszulczyk.com, he has a JavaScript program that can solve for the discount rate.
  • You can become confused by the terms used throughout this book.We use yield to maturity, discount rate, and interest rate interchangeably, and you can interpret these terms to mean an interest rate.However, a rate of return differs because investors could sell their securities before they matured.Thus, the rate or return includes the interest rate and capital gains or losses.A capital gain is an investor sells a financial security for greater price, while a capital loss is an investor sells a financial security for a lower price.Investors do not want capitallosses, but they can occur.For instance, an investor must sell an asset whose market price has dropped because he or she needs cash quickly.Thus, the present value still works for capital gains and losses.Finally, if the investor holds onto the security onto the maturity date, then the rate of return equals the yield to maturity.