Theory question 102
Purchase and Sale of GoodsCommerce 2 (answer five questions)
(a) Messrs Ola and Musa are both merchants. Ola trades on cash basis only while Musa allows credit. Give four reasons each why Ola insists on cash payment and Musa allows credit sales
(b) Distinguish between cash discount and trade discount
Show the model answer
(a) Ola (cash only), any four: avoids bad debts; keeps his capital free for buying new stock (no money tied up in debtors); avoids the cost of collecting debts and going to court; less book-keeping; small capital cannot finance credit.
Musa (credit), any four: to attract more customers and increase sales; to meet competition from rivals who give credit; to clear stock quickly, especially perishable or slow-moving goods; to keep the loyalty of regular customers; he can charge higher prices on credit; he has enough capital to wait for payment.
(b) Trade discount is a reduction from the list price given by one trader to another (e.g. manufacturer to retailer) to allow for profit or for bulk buying; it is deducted on the invoice and not entered in the books.
Cash discount is a reduction allowed to a buyer for paying promptly or within a stated period; it is given at the time of payment and recorded in the cash book.
Give four separate reasons on each side, then contrast the two discounts by purpose and timing.