USA What makes the net method GAAP compliant?

[TexasRed]

Hi I'm a sophomore accounting student taking my fundamentals of financial accounting class.In chapter 5 of my textbook we had learned what the gross method of accounting cost for inventory at purchase. Chapter 6 shows in an appendix the Net Method. I really like the Net method, however, I'm having a hard time wrapping my head around what makes it gaap compliant.

I'm begining I might have a gap in my understanding so I'm hoping somebody would happen to notice and just fill me in.

In the net method, just like gross method, transportation, insurance, possibly storage amounts are added to inventory cost. Things such as warehouses and employee wages are not typically included.

Either the Gross or Net method, a lost discount is still expensed. It's just that the gross method lost discount(which is bundled in with the value of inventory) gets expensed when the inventory is sold, while the net method lost discount is expensed immeadiately and possibly not in the same period as the exact revenue from it was generated.
-which defys the matching principle.

And I know that GAAP requires that interest expense be regarded as an operating expense so I can't justify it as a financing expense.

Can somebody help me get this?

I feel like my exact problem might be that I am missing something. Such as can financing activities result in operating costs?

What exactly is financing in accounting? I know that it is whenever a company does anything to aquire money that can be used to fuel operating activities. But looking at the net method I'm starting to thinking I'm missing something in this definition.

Thank you! This is my first post I hope to be active on this forum.

Update: "The discount is viewed as compensation to the seller for providing financing to the buyer." So I need to google what exactly financing is. But does this imply that both parties were in the middle of a financing activity? Or is only the supplier performing a financing activity and the receiver performing an operation activity? After all the aqusition of goods for sale would definitely be operating. Buying them on credit and paying later would not make it a financing activity for the company?

 

[CoolGuyGeofry]

First of all, whenever something is bought on credit, yes that's technically considered financing, even though there's no interest charged or anything.

As for your actual question, I'm also a student, so take what I say with a grain of salt if you wish, but the way I understand it is that the price of the goods don't change, it's just two different ways of accounting for the discount.

The net method sets the purchases account to the actual amount from the get-go, and then creates an expense for was paid above the discounted price. This is a period expense tied to when the purchase was made, not an element of the cost of the good (which is the same in both methods). It's just a way of keeping track of how paying part of the invoice within the discount window, and part outside it effects the price. Net vs. Gross are just two ways to say the same thing.

Youtube Net method vs. gross method, and there are a lot of good explanations of the differences.

Also, I know your semester's probably over already, but your prof would probably still be happy to help explain better than I can.

Hope that this helped!