Multiple Choice
Which of the following best describes how 'Net Sales' is calculated on an income statement?
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4. Merchandising Operations
Net Sales
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Which of the following best defines 'Net Sales' for a company like Capella Corporation?
A
Total assets minus total liabilities
B
Total sales revenue minus sales returns, allowances, and discounts
C
Net income plus depreciation expense
D
Total sales revenue before any deductions
Verified step by step guidance1
Understand the concept of 'Net Sales': Net Sales refers to the revenue a company earns from its sales activities after deducting sales returns, allowances, and discounts. It represents the actual income generated from sales transactions.
Identify the components of Net Sales: These include Total Sales Revenue, Sales Returns, Allowances, and Discounts. Each of these elements plays a role in determining the final Net Sales figure.
Break down the formula for Net Sales: The formula is Net Sales = Total Sales Revenue - Sales Returns - Allowances - Discounts. This formula ensures that any reductions in revenue due to customer returns, price adjustments, or discounts are accounted for.
Compare the options provided: Evaluate each option against the definition and formula of Net Sales. For example, 'Total assets minus total liabilities' refers to equity, not Net Sales. Similarly, 'Net income plus depreciation expense' and 'Total sales revenue before any deductions' do not align with the definition of Net Sales.
Select the correct answer: Based on the definition and formula, the correct answer is 'Total sales revenue minus sales returns, allowances, and discounts.' This matches the concept of Net Sales accurately.
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