Smart Business

Question: When inventory is acquired, some sellers are willing to accept a reduced amount to encourage fast

payment—an offer that is called a cash discount (or a sales discount or purchases discount depending on whether

the seller or the buyer is making the entry). Cash becomes available sooner so that the seller can quickly put it

back into circulation to make more profits. In addition, the possibility that a receivable will become uncollectible

is reduced if the balance due is not allowed to get too old. Tempting buyers to make quick payments to reduce

their cost is viewed as a smart business practice by many sellers.

To illustrate, assume the invoice received by the sporting goods company (Rider) for the above bicycle indicates

the proper $250 balance due but also includes the notation: 2/10, n/45. What message is being conveyed by the


How do cash discounts impact the reporting of inventory?

Answer: Sellers—such as Builder Company in this example—can offer a wide variety of discount terms to

encourage speedy payment. One such as 2/10, n/45 is generally read “two ten, net 45.” It informs the buyer that a

2 percent discount can be taken if the invoice is paid by the tenth day. Any net amount that remains unpaid (after

merchandise returns or partial cash payments) is due on the forty-fifth day. Rider has the option to pay $245 for

the bicycle within ten days of receiving the invoice by taking advantage of the $5 discount ($250 × 0.02). Or the

sporting goods company can wait until the forty-fifth day but then is responsible for the entire $250.

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