In short
Under the gross method, purchases are recorded at the invoice price and discounts taken reduce inventory cost. Under the net method, purchases are recorded net of the available discount, and discounts missed are recorded separately as a financing expense.
Key takeaways
- The net method shows the cost of failing to pay on time.
- Terms of 2/10, net 30 mean a 2% discount if paid within 10 days, otherwise the full amount in 30.
- The same choice applies to sales discounts offered to customers.
Example
A $10,000 purchase on 2/10, net 30 is recorded at $9,800 under the net method; paying on day 25 records $200 of discounts lost.
Where it's tested
FAR: Inventory — study notes, a five-minute revision sheet and practice questions.
Practise: 3 questions
Question 1 of 3 · 0 answered
A company uses LIFO for both tax and financial reporting. During a period of rising prices, which of the following is true relative to FIFO?