Multiple Choice
Which of the following best describes 'Net Sales' in financial accounting?
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4. Merchandising Operations
Net Sales
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Why is net income typically lower than gross income on a company's income statement?
A
Because net income includes only cash sales, while gross income includes all sales.
B
Because net income adds back all discounts and returns to gross income.
C
Because net income subtracts expenses such as cost of goods sold, operating expenses, interest, and taxes from gross income.
D
Because net income is calculated before deducting any expenses.
Verified step by step guidance1
Understand the difference between gross income and net income: Gross income represents the total revenue generated by a company before any expenses are deducted, while net income is the profit remaining after all expenses are subtracted.
Identify the types of expenses subtracted from gross income to calculate net income: These typically include cost of goods sold (COGS), operating expenses, interest expenses, and taxes.
Recognize that net income reflects the company's profitability after accounting for all necessary costs and obligations, making it a more accurate measure of financial performance than gross income.
Clarify why net income is typically lower than gross income: Since net income accounts for expenses, it is reduced by the costs incurred during operations, whereas gross income does not consider these deductions.
Review the incorrect options provided in the problem to ensure understanding: Net income does not include only cash sales, nor does it add back discounts and returns to gross income. Additionally, net income is calculated after deducting expenses, not before.
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