Multiple Choice
Which of the following best describes 'Net Sales' for a business such as a sole proprietorship, partnership, or other unincorporated entity?
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4. Merchandising Operations
Net Sales
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Assuming all of June's sales were made on account and there were no returns or allowances, how would net sales from June's transactions affect stockholders' equity?
A
Net sales have no effect on stockholders' equity.
B
Net sales decrease stockholders' equity by increasing liabilities.
C
Net sales decrease stockholders' equity by increasing expenses.
D
Net sales increase stockholders' equity by increasing revenues.
Verified step by step guidance1
Understand the concept of net sales: Net sales represent the total revenue generated from sales after deducting any sales returns, allowances, and discounts. In this case, since there are no returns or allowances, net sales equal total sales revenue.
Recall the relationship between revenues and stockholders' equity: Revenues are a component of the income statement and contribute to net income. Net income, in turn, increases retained earnings, which is a part of stockholders' equity.
Analyze the impact of net sales on stockholders' equity: Since net sales increase revenues, they positively affect net income. Higher net income leads to an increase in retained earnings, thereby increasing stockholders' equity.
Eliminate incorrect options: Net sales do not decrease stockholders' equity by increasing liabilities or expenses. Instead, they increase stockholders' equity by contributing to revenues.
Conclude the correct answer: Net sales increase stockholders' equity by increasing revenues, as revenues are directly tied to the profitability and retained earnings of the company.
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