Question

Respond to one of the following:

1. Consider the following statement: “F.O.B. destination means that title to the goods will switch to the buyer when goods are shipped.” Do you agree or disagree with the statement? Explain your answer. Also, what is the difference between an F.O.B. shipping point and an F.O.B. destination? Use at least one online reference to support your response.

2. What is the relationship between a purchase requisition and a purchase order? Why would a purchaser issue a debit memorandum? Lastly explain why a trade discount is not a cash discount. Please provide detailed responses, including examples when possible.

Answer 1

Relationship between purchase requisition and purchase order:

A purchase requisition is a requisition from a department to purchase department or stores department for indenting purchase of the items mentioned in the document. A purchase requisition is an internal document used by various departments. It is signed by the departmental heads and counter signed by the store’s manager and documented as part of purchase procedure. For example: Request by production shop floor to get machinery spare parts from the vendor.

A Purchase order is an order issued to the supplier for supplying items mentioned in the purchase order. It is a legally binding external document based on which supplier supplies the material and sends the invoice along with it. A purchase order has details of description of items, the pre-agreed rate, quantity, the date why by supply is needed and terms of credit.

A purchaser would issue debit memorandum when the items do not conform to the quality specifications or pre-agreed standards of performance. It is usually given for quality rejections or poor quality of material supplied. The supplier would be intimated with a debit memorandum which has details of item and quantity and reasons for rejection of item or material.

Trade discount and Cash discount:

A Trade discount is a discount given on the catalogue price or listed price of the product. The trade discount varies from customer to customer since it is given based on long term relationship between the parties. For example: A supplier having a catalogue of 10 products can offer trade discount based on the catalogue price to a specific corporate customer who has been trading for past 10 years. Trade discount is a normal industry practice which helps in developing business on long term basis

A cash discount is given for early payment of the dues and it is not based on catalogue price or any other defined price. It is given on outstanding receivables due for payment within specific period. For example 2/10 net 30 discount can be offered to customers which means if payment is received within 10 days 2 % discount is given else payment has to be made within 30 days with no discount from 11^th day to 30^th day.