(a) Messrs Ola and Musa are both merchants. Ola trades on a 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.
Explanation
(a) Reasons why Musa allows credit sales are:
(i) Musa allows credit sales to make it possible for customers to have immediate possession of goods they need, even if they do not pay once.
(ii) He allows credit sales to increase his sales
(iii) Credit sales bring higher profit.
(iv) The increased sales which result from granting credit reduces the risk of holding stock.
Reasons, why Ola insists on Cash payment, are:
(i) Ola insists on cash payment to reduce the risk of non-payment.
(ii) Credit sales involve a lot of bookkeeping.
(iii) To avoid additional expenses resulting from court action against a defaulter.
(iv) The capital of the business will not be eroded as a result of continuous credit sales.
(b) Cash discount; is the allowance given to the buyer by the seller to encourage prompt payment. Cash discount terms are stated on the invoice that accompanies the goods. Trade discount is the allowance off the price list. It is a deduction in the standard price or catalogue price of goods on sale to encourage quantity purchase or to provide for the retailer’s gross profit margin. It is quoted as a percentage deduction from the retail price.