Multiple Choice
To determine a firm's net sales, which of the following must be subtracted from gross sales?
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4. Merchandising Operations
Net Sales
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A positive operating cash flow indicates that the firm is generating enough cash to:
A
increase its net sales without increasing costs
B
eliminate the need for external financing
C
cover its day-to-day operating expenses
D
pay off all long-term debt immediately
Verified step by step guidance1
Understand the concept of operating cash flow: Operating cash flow is the cash generated from a company's normal business operations. It is a key indicator of whether a company can sustain its operations without relying on external financing.
Analyze the options provided: Each option represents a potential use of positive operating cash flow. Evaluate whether the cash flow generated is sufficient to achieve the stated goal.
Option 1: 'Increase its net sales without increasing costs' - Positive operating cash flow does not directly indicate the ability to increase sales without increasing costs. This is more related to operational efficiency and revenue growth strategies.
Option 2: 'Eliminate the need for external financing' - While positive operating cash flow reduces reliance on external financing, it does not necessarily eliminate the need for it, especially for large investments or expansions.
Option 3: 'Cover its day-to-day operating expenses' - Positive operating cash flow is primarily used to cover daily operational expenses, such as salaries, utilities, and inventory costs, ensuring the business can continue functioning effectively.
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