# Terms and Conditions of Purchase or Sale/Activities

| Unit 5.1-Terms and Conditions of Purchase or Sale | Introduction | Modes of Entry | Terms of Sale | Applying Your Knowledge | Commercial Agreements | Summary | Resources | Activities | Assessment Go to Unit 5.1 | Unit 5.2 Return to Trade Finance Module 5: Selecting Payment Methods |

## Activity

Select a variety of foreign countries and the same number of products and/or services.
1. Divide the class into groups of 4 or other even numbers and assign a country and product or service to each group.
2. Have each group research their country and identify the country risks.
3. Divide each group in half with one- half representing buyers (importers) and the other half sellers (exporters).
4. Assign specific characteristics to each company:
   * large or small – (sales and staff)
   * time in business - (2 years or 10 years)
   * profitability and cash flow - (strong or weak)
   * international experience – (little or a lot)
5. Have each group identify the business relationship they would want to establish. Include
   * method of payment
   * contract components
6. Bring the buyers and sellers back together to negotiate their positions and come to agreement.
7. Have the buyers and sellers create a document outlining the key points of their relationship.
8. Discuss as a class the issues that were raised in the negotiations and the way they were resolved.
   * product/service
   * country
   * company

### Countertrade Activity

This classroom exercise will engage the students in countertrade activity. The students will also have an easy introduction to balance sheet and income statement transaction activity. The groups will have similar circumstances and monetary value but the outcome of the exercise should produce dissimilar profitability.
The students are broken down into four groups by the facilitator. Each group will be given a random group number and its countertrade task provided below but only for task 1 all subsequent tasks will be given after completion of the prior task. None of the students will have the luxury of a tradable currency to complete their transactions until the last task. They will use some form of countertrade to achieve their profit objectives. The exercise can be done in one session or over several sessions but each task should be separated by a discussion break and then distribute the next task providing time for the students to formulate a strategy for each successive task.

#### Task 1

Each company will be given a task sheet outlining a set of circumstances which from a strategic standpoint should not be shared with any other company. Company 1 and Company 3 should be introduced by the facilitator and allowed to barter their goods. Company 2 and Company 4 should also be introduced by the facilitator and allowed to barter their goods. Once the task is complete the facilitator should pass out task 2.
Profile Company 1
Company 1 is a computer manufacturer. Their recent audit has forced them to write down their inventory as indicated in their income statement below. The auditors discovered the inventory contained product that was over one year old and a newer product has recently replaced this particular line. The company could not find a domestic buyer to buy the older line and had no other prospective buyers. This is the reason the auditors forced this action.
The company has also just lost a major supplier of component parts. This is the only domestic supplier of these component parts. The company will face bankruptcy if they do not find a new supplier and must take any risks necessary to get these parts. Any replacement component parts purchased if not used within the organization can be sold in the local market for a profit because of the shortage of supplies in the market.
Below is the balance sheet and income statement for Company 1. Please note in order to keep the example simple only the items necessary to complete the tasks will be given in the income statement and balance sheet.
       Company 1
       Balance Sheet
Cash..........................................$ 0.00
Inventory.....................................$1,000,000.00
Total Assets................................$1,000,000.00
Liabilities and Equity
Accumulated Gain/(Loss).............$1,300,000.00
Current Year Gain/(Loss)..............$ (300,000.00)
Total Liabilities and Equity............$1,000,000.00
       Company 1
       Income Statement
Income........................................$ 0.00
Expense (Inventory write down)......$300,000.00
Income Before Tax........................$(300,000.00)
Inventory consists of 1,300 units at a cost before the inventory write down of $1,000.00 per unit. There are 300 units that are older models and have been in inventory for over 1 year. Accumulated Gains are all prior years’ accumulated retained earnings or profits. Each computer in inventory is normally sold to a retailer for $2,000.00 per unit.
Profile Company 2
Company 2 is a television manufacturer. Their recent audit has forced them to write down their inventory as indicated in their income statement below. The auditors discovered the inventory contained product that was over one year old and a newer product has recently replaced this particular line. The company could not find a domestic buyer to buy the older line and had no other prospective buyers. This is the reason the auditors forced this action.
The company has also just lost a major supplier of component parts. This is the only domestic supplier of these component parts. The company will face bankruptcy if they do not find a new supplier and must take any risks necessary to get these parts. Any replacement component parts purchased if not used within the organization can be sold in the local market for a profit because of the shortage of supplies in the market.
Below is the balance sheet and income statement for Company 2. Please note in order to keep the example simple only the items necessary to complete the tasks will be given in the income statement and balance sheet.
       Company 2
       Balance Sheet
Cash..........................................$ 0.00
Inventory.....................................$1,000,000.00
Total Assets...............................$1,000,000.00
Liabilities and Equity
Accumulated Gain/(Loss)..............$1,300,000.00
Current Year Gain/(Loss)..............$ (300,000.00)
Total Liabilities and Equity............$1,000,000.00
       Company 2
       Income Statement
Income.................. ......................$ 0.00
Expense (Inventory write down).......$ 300,000.00
Income Before Tax.........................$ (300,000.00)
Inventory consists of 1,300 units at a cost before the inventory write down of $1,000.00 per unit. There are 300 units that are older models and have been in inventory for over 1 year.
Accumulated Gains are all prior years’ accumulated retained earnings or profits. Each computer in inventory is normally sold to a retailer for $2,000.00 per unit.
Profile Company 3
Company 3 is a computer component parts manufacturer. The company is very profitable and reputable but domiciled in an underdeveloped country without a tradable currency. The company exports all of the products it produces because there are no manufacturers in their local market. The company has been building inventory under contract for a major buyer however they have just learned that the company has declared bankruptcy and will not be able to pay them or meet their contractual obligation. The company must find a new buyer or face bankruptcy. The company in the past has been very successful at importing finished computers in exchange for their component parts and selling them in the local market at a significant profit.
Below is the balance sheet and income statement for Company 3. Please note in order to keep the example simple only the items necessary to complete the tasks will be given in the income statement and balance sheet.
       Company 3
       Balance Sheet
Cash...........................................$ 0.00
Inventory......................................$1,000,000.00
Total Assets.................................$1,000,000.00
Liabilities and Equity
Accumulated Gain/(Loss)..............$1,000,000.00
Current Year Gain/(Loss)...............$ 0.00
Total Liabilities and Equity.............$1,000,000.00
       Company 3
       Income Statement
Income.........................................$ 0.00
Expense (Cost of Goods Sold)........$ 0.00
Income Before Tax........................$ 0.00
Inventory consists of 1,000,000 units at a cost of $1.00 per component part. Accumulated Gains are all prior years’ accumulated retained earnings or profits. Each component part normally sells for $2.00 per unit.
Profile Company 4
Company 4 is a television component parts manufacturer. The company is very profitable and reputable but domiciled in an underdeveloped country without a tradable currency. The company exports all of the products it produces because there are no manufacturers in their local market. The company has been building inventory under contract for a major buyer however they have just learned that the company has declared bankruptcy and will not be able to pay them or meet their contractual obligation. The company must find a new buyer or face bankruptcy. The company in the past has been very successful at importing finished televisions in exchange for their component parts and selling them in the local market at a significant profit.
Below is the balance sheet and income statement for Company 4. Please note in order to keep the example simple only the items necessary to complete the tasks will be given in the income statement and balance sheet.
       Company 4
       Balance Sheet
Cash.............................................$ 0.00
Inventory........................................$1,000,000.00
Total Assets..................................$1,000,000.00
Liabilities and Equity
Accumulated Gain/(Loss)................$1,000,000.00
Current Year Gain/(Loss).................$ 0.00
Total Liabilities and Equity...............$1,000,000.00
       Company 4
       Income Statement
Income...........................................$ 0.00
Expense (Cost of Goods Sold).........$ 0.00
Income before Tax...........................$ 0.00
Inventory consists of 1,000,000 units at a cost of $1.00 per component part. Accumulated Gains are all prior years’ accumulated retained earnings or profits. Each component part normally sells for $2.00 per unit.

##### Task 1 Company 1

You will be introduced to Company 3 by the facilitator. Company 3 has the component parts that you desperately need. Company 3 is domiciled in an underdeveloped country without a tradable currency. Your company only has its inventory to negotiate with. The old supplier of the component parts that you are seeking to replace charged you $3.00 per component part. The company feels if they can acquire these component parts the local market will pay $4.00 because of the shortage in the market. Your objective is to barter as many units of your inventory especially the older inventory for your needed component parts knowing that you must achieve your normal profit margins. The negotiations between the two companies will be an all in price avoiding the need to identify separately items such as insurance and freight. This information is considered confidential and should not be shared outside of the company.

##### Task 1 Company 2

You will be introduced to Company 4 by the facilitator. Company 4 has the component parts that you desperately need. Company 4 is domiciled in an underdeveloped country without a tradable currency. Your company only has its inventory to negotiate with. The old supplier of the component parts that you are seeking to replace charged you $3.00 per component part. The company feels if they can acquire these component parts the local market will pay $4.00 because of the shortage in the market. Your objective is to barter as many units of your inventory especially the older inventory for your needed component parts knowing that you must achieve your normal profit margins. The negotiations between the two companies will be an all in price avoiding the need to identify separately items such as insurance and freight. This information is considered confidential and should not be shared outside of the company.

##### Task 1 Company 3

You will be introduced to Company 1 by the facilitator. Company 1 can barter finished goods for your component parts. The local market has been paying $3,000.00 for older product and $4,000.00 for newer product. You do not have a tradable currency so you must barter. Your objective is to barter as many units of your inventory for finished goods knowing that you must achieve your normal profit margins. You are restricted by your local government to maintain 25% of your current inventory. This restriction was applied when you were allowed to export your product. The local government intends to use the proceeds from sale of your restricted inventory to help increase their foreign currency reserves. The negotiations between the two companies will be an all in price avoiding the need to identify separately items such as insurance and freight. This information is considered confidential and should not be shared outside of the company.

##### Task 1 Company 4

You will be introduced to Company 2 by the facilitator. Company 1 can barter finished goods for your component parts. The local market has been paying $3,000.00 for older product and $4,000.00 for newer product. You do not have a tradable currency so you must barter. Your objective is to barter as many units of your inventory for finished goods knowing that you must achieve your normal profit margins. You are restricted by your local government to maintain 25% of your current inventory. This restriction was applied when you were allowed to export your product. The local government intends to use the proceeds from sale of your restricted inventory to help increase their foreign currency reserves. The negotiations between the two companies will be an all in price avoiding the need to identify separately items such as insurance and freight. This information is considered confidential and should not be shared outside of the company.

#### Task 2

Each company will have to calculate the income or loss from the completion of task 1. They will place goods on consignment with the same company they have been dealing with. The transaction will be completed with the delivery of another product that must be sold.

##### Task 2 Company 1

You have discovered that the component parts that you bought were more valuable if sold directly in the local market for $4.00 per unit and you sold all that you had. You have sold all of your bartered goods and have increased your cash and sales and have reduced your inventory by the amount of units you bartered. You will approach Company 3 to take on consignment all of your remaining inventory and are willing to take on consignment any of their units. Your company has negotiated with the local government of Company 3 to buy with the proceeds from the sale of your inventory grain for $1,000.00 per ton in order to get the proceeds out of the country. All related costs are included in the $1,000.00 per ton of grain. You must decide on what price to charge Company 3 for each piece of your inventory that they sell knowing that you will have additional costs to sell the grain purchased from the local government. You have also discovered Company 3 has been getting a minimum of $4,000.00 per unit in selling your newer products. You must decide on how much you will be paid per unit if your remaining inventory is sold by Company 3.

##### Task 2 Company 2

You have discovered that the component parts that you bought were more valuable if sold directly in the local market for $4.00 per unit and you sold all that you had. You have sold all of your bartered goods and have increased your cash and sales and have reduced your inventory by the amount of units you bartered. You will approach Company 4 to take on consignment all of your remaining inventory and are willing to take on consignment any of their units. Your company has negotiated with the local government of Company 4 to buy with the proceeds from the sale of your inventory grain for $1,000.00 per ton in order to get the proceeds out of the country. All related costs are included in the $1,000.00 per ton of grain. You must decide on what price to charge Company 4 for each piece of your inventory that they sell knowing that you will have additional costs to sell the grain purchased from the local government. You have also discovered Company 4 has been getting a minimum of $4,000.00 per unit in selling your newer products. You must decide on how much you will be paid per unit if your remaining inventory is sold by Company 4.

##### Task 2 Company 3

You have been very successful in selling the inventory that you bartered for at the market price of $3,000.00 for older units and $4,000.00 for newer units. You have sold all of your bartered goods and have increased your cash and sales and have reduced your inventory by the amount of units you bartered. You have been given permission by the local government to put the remaining 25% of your component parts on consignment in exchange for taking on consignment any remaining inventory available from Company 1. The local government has agreed to sell grain to be exported at a cost of $1,000.00 per ton to Company 1. You will be able to offset the value of the units sold that you put on consignment with Company 1 by the equivalent value of units taken on consignment. Company 1 does not know you have this advantage. You must convince them of this offset or you will be forced to pay the local government a 10% commission on the consigned goods sold by Company 1 on your behalf. You have also discovered Company 1 has been getting a minimum of $4.00 per unit in selling your product. You must decide on how much you will be paid per unit if your remaining inventory is sold by Company 1.

##### Task 2 Company 4

You have been very successful in selling the inventory that you bartered for at the market price of $3,000.00 for older units and $4,000.00 for newer units. You have sold all of your bartered goods and have increased your cash and sales and have reduced your inventory by the amount of units you bartered. You have been given permission by the local government to put the remaining 25% of your component parts on consignment in exchange for taking on consignment any remaining inventory available from Company 2. The local government has agreed to sell grain to be exported at a cost of $1,000.00 per ton to Company 2. You will be able to offset the value of the units sold that you put on consignment with Company 1 by the equivalent value of units taken on consignment. Company 2 does not know you have this advantage. You must convince them of this offset or you will be forced to pay the local government a 10% commission on the consigned goods sold by Company 2 on your behalf. You have also discovered Company 2 has been getting a minimum of $4.00 per unit in selling your product. You must decide on how much you will be paid per unit if your remaining inventory is sold by Company 2.

#### Task 3

All transactions will be converted to cash and the outcome of all the transactions posted to the balance sheet and income statement.

##### Task 3 Company 1

You have sold all of the parts that you received on consignment for the asking price of $4.50 a unit. You have paid or offset as agreed with Company 3 the value of their consignment goods. You have found a broker to buy the grain for your asking price of $1,000.00 per ton at a cost of $100.00 per ton (prorated for partial tons) to repatriate the value of your consignment goods. Company 3 has sold your inventory at the agreed price which you have received in the amount of grain purchased from their local government. Your holdings can now be converted to cash and determine how much profit or loss you have made.

##### Task 3 Company 2

You have sold all of the parts that you received on consignment for the asking price of $4.50 a unit. You have paid or offset as agreed with Company 4 the value of their consignment goods. You have found a broker to buy the grain for your asking price of $1,000.00 per ton at a cost of $100.00 per ton (prorated for partial tons) to repatriate the value of your consignment goods. Company 4 has sold your inventory at the agreed price which you have received in the amount of grain purchased from their local government. Your holdings can now be converted to cash and determine how much profit or loss you have made.

##### Task 3 Company 3

You have sold all of the parts that you received on consignment for the asking price of $4,500.00 a unit. You have through the local government settled the remaining value of the agreed upon price of the consignment goods of Company 1 in grain and offset as agreed the value of your consigned goods all of which have been sold by Company 1. Do not forget if you were unable to negotiate the full amount of the offset or any portion a 10% tax will apply and taken directly by your local government. Your holdings can now be converted to cash and determine how much profit or loss you have made.

##### Task 3 Company 4

You have sold all of the parts that you received on consignment for the asking price of $4,500.00 a unit. You have through the local government settled the remaining value of the agreed upon price of the consignment goods of Company 2 in grain and offset as agreed the value of your consigned goods all of which have been sold by Company 2. Do not forget if you were unable to negotiate the full amount of the offset or any portion a 10% tax will apply and taken directly by your local government. Your holdings can now be converted to cash and determine how much profit or loss you have made.