Multiple Choice
Which of the following best defines 'Net Sales' for a company like Capella Corporation?
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4. Merchandising Operations
Net Sales
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If a company reports net sales of \$8,000 at the end of the accounting period, which of the following best describes 'net sales'?
A
Total sales revenue minus sales returns, allowances, and discounts
B
Total cash received from customers during the period
C
Total sales revenue minus cost of goods sold
D
Total sales revenue before any deductions
Verified step by step guidance1
Understand the term 'net sales': Net sales represent the total revenue generated from sales after deducting sales returns, allowances, and discounts. It is a key metric used to evaluate the actual revenue earned from sales activities.
Identify the components of net sales: Net sales are calculated by subtracting sales returns (products returned by customers), allowances (price reductions for defective goods or services), and discounts (price reductions offered to customers) from total sales revenue.
Clarify why other options are incorrect: For example, 'Total cash received from customers during the period' refers to cash inflows, not net sales. 'Total sales revenue minus cost of goods sold' calculates gross profit, not net sales. 'Total sales revenue before any deductions' refers to gross sales, not net sales.
Relate net sales to the accounting period: Net sales are reported for a specific accounting period and are used to assess the company's performance during that time frame.
Conclude with the correct definition: Net sales are best described as 'Total sales revenue minus sales returns, allowances, and discounts,' as this reflects the actual revenue earned after accounting for deductions.
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