Multiple Choice
Which of the following best describes how 'Net Sales' is calculated on an income statement?
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4. Merchandising Operations
Net Sales
Multiple Choice
Which of the following details best indicates that Edward was making a good profit from his sales?
A
His gross sales were equal to his net sales.
B
He had a high amount of sales returns and allowances.
C
His net sales significantly exceeded his cost of goods sold.
D
His operating expenses were higher than his net sales.
Verified step by step guidance1
Understand the key terms in the problem: Gross sales, net sales, cost of goods sold (COGS), and operating expenses. Gross sales represent the total sales before deductions, while net sales are gross sales minus sales returns and allowances. COGS refers to the direct costs of producing goods sold by a company, and operating expenses are the costs incurred during normal business operations.
Analyze the relationship between net sales and cost of goods sold (COGS). A good profit is typically indicated when net sales significantly exceed COGS, as this means the company is generating a substantial gross profit.
Consider the impact of sales returns and allowances. A high amount of sales returns and allowances would reduce net sales, which could negatively affect profitability. Therefore, this detail does not indicate good profit.
Evaluate the relationship between operating expenses and net sales. If operating expenses are higher than net sales, the company is likely operating at a loss, which does not indicate good profit.
Conclude that the best indicator of Edward making a good profit is when his net sales significantly exceed his cost of goods sold, as this demonstrates a healthy gross profit margin.
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