Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

4. Merchandising Operations

Net Sales

Financial Accounting

4. Merchandising Operations

Net Sales

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Multiple Choice

Which of the following is the correct interpretation of a degree of operating leverage (DOL) of 5?

A 5% increase in sales will result in a 1% increase in operating income.

Operating expenses are 5 times greater than sales revenue.

A 1% increase in sales will result in a 5% increase in operating income.

Net sales are 5 times greater than net income.

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Verified step by step guidance

Step 1: Understand the concept of Degree of Operating Leverage (DOL). DOL measures the sensitivity of operating income to changes in sales. It is calculated as the percentage change in operating income divided by the percentage change in sales.

Step 2: Recall the formula for DOL: \( DOL = \frac{\text{Percentage Change in Operating Income}}{\text{Percentage Change in Sales}} \). This formula indicates how much operating income will change for a given change in sales.

Step 3: Interpret the given DOL value of 5. A DOL of 5 means that for every 1% increase in sales, operating income will increase by 5%. This is because the DOL value represents the multiplier effect of sales changes on operating income.

Step 4: Analyze the options provided. The correct interpretation aligns with the formula and concept of DOL. Specifically, the statement 'A 1% increase in sales will result in a 5% increase in operating income' correctly reflects the meaning of a DOL of 5.

Step 5: Eliminate incorrect options. For example, 'Operating expenses are 5 times greater than sales revenue' and 'Net sales are 5 times greater than net income' are unrelated to the concept of DOL. Focus on the relationship between sales and operating income to identify the correct interpretation.