Multiple Choice
What is 'value added' in the context of financial accounting, and how is it calculated?
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4. Merchandising Operations
Net Sales
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Which of the following best describes how total revenue is calculated in relation to net sales?
A
Total revenue = Net sales + Operating expenses
B
Total revenue = Net sales - Cost of goods sold
C
Total revenue = Net sales + Other revenues
D
Total revenue = Gross sales - Sales returns and allowances - Sales discounts
Verified step by step guidance1
Step 1: Understand the concept of total revenue. Total revenue represents the total amount of income generated by a company from its sales and other revenue sources during a specific period.
Step 2: Break down the components of net sales. Net sales are calculated as Gross Sales minus Sales Returns and Allowances minus Sales Discounts. This represents the actual revenue earned from sales after accounting for deductions.
Step 3: Recognize the relationship between net sales and total revenue. Total revenue includes net sales plus any additional revenue sources, such as interest income, rental income, or other non-operating revenues.
Step 4: Compare the given options. Analyze each formula to determine which one correctly incorporates net sales and other revenues to calculate total revenue.
Step 5: Identify the correct formula. Based on the explanation, the correct formula for total revenue is: Total revenue = Net sales + Other revenues.
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