Multiple Choice
In which section of the income statement are post-tax dollar contributions, such as net sales, typically found?
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4. Merchandising Operations
Net Sales
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Which of the following best describes the effect of a cash discount taken by the customer on net sales?
A
It has no effect on net sales.
B
It is recorded as an operating expense.
C
It reduces net sales by the amount of the discount.
D
It increases net sales by the amount of the discount.
Verified step by step guidance1
Understand the concept of a cash discount: A cash discount is a reduction in the invoice price offered by the seller to the buyer for prompt payment. It is typically recorded as a deduction from sales revenue.
Recognize the relationship between cash discounts and net sales: Net sales are calculated as gross sales minus sales returns, allowances, and discounts. A cash discount reduces the gross sales amount, thereby reducing net sales.
Analyze the options provided: The correct answer should align with the definition of net sales and the impact of cash discounts. A cash discount does not increase net sales, nor is it recorded as an operating expense. It directly reduces net sales.
Apply the accounting principle: When a customer takes a cash discount, the seller records the discount as a reduction in sales revenue, which decreases the net sales figure.
Conclude the reasoning: Based on the explanation, the correct answer is that a cash discount taken by the customer reduces net sales by the amount of the discount.
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