Multiple Choice
The amount of net sales is determined by which of the following formulas?
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4. Merchandising Operations
Net Sales
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Which of the following is a benefit of a net operating loss (NOL) carryforward?
A
It increases the company's reported revenue.
B
It eliminates the need to pay any taxes in the current year.
C
It increases the company's net sales for the current period.
D
It allows a company to reduce taxable income in future years.
Verified step by step guidance1
Understand the concept of Net Operating Loss (NOL): A Net Operating Loss occurs when a company's allowable tax deductions exceed its taxable income for a given period. This loss can be used to offset taxable income in other years, either in the past (carryback) or future (carryforward).
Recognize the purpose of NOL carryforward: The primary benefit of an NOL carryforward is that it allows a company to reduce taxable income in future years, which can lower the amount of taxes owed in those years.
Clarify why the other options are incorrect: NOL carryforward does not increase reported revenue, net sales, or eliminate taxes in the current year. Its sole function is to provide tax relief by offsetting future taxable income.
Relate the concept to financial accounting: In financial accounting, NOL carryforward is recorded as a deferred tax asset on the balance sheet, reflecting the future tax savings the company expects to realize.
Summarize the correct answer: The correct benefit of an NOL carryforward is that it allows a company to reduce taxable income in future years, providing a financial advantage by lowering future tax liabilities.
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