Why supplier payments get different classifications

Read the two records

The prospectus discusses procurement savings from supplier rebates.

In the FY2024 report, note 3.12 deducts earned purchase rebates from sold goods’ cost or unsold inventories. Note 3.13 treats separately earned display, distribution-centre and marketing allowances as other operating income.

A business description explains the commercial relationship. An accounting policy explains recognition and classification. Reading them together helps distinguish a cheaper purchase from a separately performed service.

Sources for this section: [1] · [2]

Exercise: stipulate the transactions

Use fictional currency units. A retailer buys 100 identical items at 10 each and fully earns a 10% purchase-price rebate attributable to those items. It sells 60 at 12 each; 40 remain. Separately, it earns 40 for a completed display service. In this model that service receipt is other operating income.

Calculate customer sales, net purchase cost, cost of goods sold, closing inventory and gross profit. Keep the service receipt separate. Treat 10 per item as the complete pre-rebate inventory cost, with no returns or other inventory adjustments. Assume equal unit costs, proportional allocation and fulfilled conditions. Other period expenses and taxes are unspecified; do not assume they are zero. These are fictional transactions.

Sources for this section: [1]

Reference answer: follow the goods

The purchase cost is 100 × 10 = 1,000. The rebate is 100, leaving 900, or 9 per item. Cost of goods sold is 60 × 9 = 540; closing inventory is 40 × 9 = 360. The two allocations add back to 900, a useful reconciliation check.

Customer sales are 60 × 12 = 720. Gross profit is 720 − 540 = 180. The separate service adds 40 in its stipulated income category; it does not turn customer sales into 760 or gross profit into 220. Net profit remains undetermined because other expenses have not been supplied.

Sources for this section: [1]

Change one assumption

Now suppose only 25 items are sold at the same price, with the same earned rebate. Recalculate without changing the purchase cost. The answer is sales of 300, cost of goods sold of 225, inventory of 675 and gross profit of 75. The independent completed-service receipt remains 40.

Selling fewer items changes how the purchase cost is divided between the period’s expense and the stock remaining. It does not make the entire rebate a new customer sale. If the rebate has not yet been earned, this worksheet’s recognition assumption no longer applies; obtain the actual agreement and policy before calculating.

Sources for this section: [1]

What the worksheet establishes

The exercise makes a classification choice and an allocation rule explicit, then checks that the amounts reconcile. It cannot determine whether a real supplier contract has been fulfilled, whether stock is impaired, or whether a separate service has actually been delivered.

When reading another set of accounts, locate the policy before comparing totals. Ask whether the reported amount concerns customers, purchases, inventories or another activity. A ratio made from mismatched categories can be arithmetically correct while answering the wrong question.

Sources for this section: [1] · [2]