Multiple Choice
Which of the following statements best describes the difference between net income and gross profit?
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4. Merchandising Operations
Net Sales
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Which of the following should be accounted for in the calculation of net operating income?
A
Sales returns and allowances
B
Income tax expense
C
Dividends paid
D
Cost of goods sold
Verified step by step guidance1
Understand the concept of net operating income (NOI). Net operating income is a measure of a company's profitability from its core operations, excluding non-operating items such as taxes, interest, and dividends.
Identify the components that are included in the calculation of net operating income. These typically include revenues (such as sales) and operating expenses (such as cost of goods sold, selling expenses, and administrative expenses).
Analyze each item listed in the problem: Sales returns and allowances, Income tax expense, Dividends paid, and Cost of goods sold. Determine whether each item is part of operating activities or non-operating activities.
Recognize that sales returns and allowances are adjustments to revenue and should be considered in the calculation of net operating income. Income tax expense and dividends paid are non-operating items and are excluded from NOI calculations.
Conclude that cost of goods sold is an operating expense directly related to the production or purchase of goods sold by the company. It is included in the calculation of net operating income.
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