Question

Ford Motor Co. is considering alternate methods of accounting for the cash discounts it takes when paying suppliers promptly. One method suggested was to report these discounts as financial income when payments are made. Comment on the propriety of this approach.

Short answer

The gross method of reporting discount income is applied due to simplicity and cost constraints.

Step-by-step solution

Cash discount treatment

Cash discounts received on inventory purchases can be treated by gross method or net method.

Under the gross method, the discount received are recognized at the time of payment. In contrast, the purchase is recognized at a discount under the net method, and at the time of payment, the purchase discount lost is recognized.

Priority of gross method

The gross method is given priority because of two reasons –

a) Because of the simplicity and widespread of the method

b) To avoid the reporting of discount loss