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

When D and W Co. sells its last season’s inventory to a discount store, how should the transaction be reported on the income statement in relation to net sales?

The sales amount should be excluded from net sales because it is a clearance sale.

The sales amount should be reported as other income, not as part of net sales.

The sales amount should be included in net sales, less any applicable sales returns, allowances, or discounts.

The sales amount should be included in net sales only if sold at full price.

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Verified step by step guidance

Understand the concept of net sales: Net sales represent the total revenue generated from sales of goods or services, minus any sales returns, allowances, or discounts. It is a key figure on the income statement that reflects the company's core operating revenue.

Clarify the nature of the transaction: The sale of last season’s inventory to a discount store is still a sale of goods, regardless of whether it is sold at a discounted price or as part of a clearance sale. This type of transaction is part of the company's normal business operations.

Determine how the transaction should be reported: Since the sale of inventory is part of the company's regular business activities, the revenue generated from this transaction should be included in net sales. However, any applicable sales returns, allowances, or discounts must be deducted from the gross sales amount to calculate net sales.

Address common misconceptions: The sales amount should not be excluded from net sales simply because it is a clearance sale. Similarly, it should not be reported as 'other income,' as it is directly related to the company's primary business operations.

Conclude the reporting method: The correct approach is to include the sales amount in net sales on the income statement, less any applicable sales returns, allowances, or discounts. This ensures accurate representation of the company's revenue from its core business activities.