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

Why is operating income frequently substituted for net income in the calculation of Return on Investment (ROI) and Return on Equity (ROE)?

Because operating income includes all revenues and expenses, including those unrelated to core operations.

Because operating income is calculated after deducting dividends paid to shareholders.

Because net income is always higher than operating income, making ratios less meaningful.

Because operating income excludes non-operating items and taxes, providing a clearer measure of core business performance.

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Verified step by step guidance

Understand the concept of operating income: Operating income represents the profit generated from a company's core business operations, excluding non-operating items such as interest income, interest expense, and taxes.

Understand the concept of net income: Net income is the total profit of a company after all expenses, including non-operating items and taxes, have been deducted.

Recognize the purpose of ROI and ROE: Return on Investment (ROI) and Return on Equity (ROE) are financial metrics used to evaluate the efficiency and profitability of a company in generating returns from its investments or equity.

Identify why operating income is preferred: Operating income is frequently substituted for net income in ROI and ROE calculations because it excludes non-operating items and taxes, providing a clearer measure of the company's core business performance.

Conclude the reasoning: Using operating income ensures that the focus remains on the operational efficiency and profitability of the business, without the distortion caused by external factors like taxes or non-operating revenues and expenses.