Multiple Choice
A company reports net sales of \$500,000 and net income of \$50,000 for the current year. What is the firm's current year net profit margin?
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4. Merchandising Operations
Net Sales
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Which of the following best describes 'Net Sales' for a business such as a sole proprietorship, partnership, or other unincorporated entity?
A
Total revenue minus operating expenses
B
Total revenue minus cost of goods sold
C
Total revenue minus sales returns, allowances, and discounts
D
Total revenue minus income tax expense
Verified step by step guidance1
Step 1: Understand the concept of 'Net Sales'. Net Sales refers to the revenue generated by a business after deducting sales returns, allowances, and discounts. It represents the actual income from sales transactions.
Step 2: Analyze the options provided in the problem. Each option describes a different calculation related to revenue or expenses. Focus on identifying which calculation aligns with the definition of Net Sales.
Step 3: Eliminate incorrect options. For example, 'Total revenue minus operating expenses' refers to operating income, not Net Sales. Similarly, 'Total revenue minus cost of goods sold' refers to gross profit, and 'Total revenue minus income tax expense' relates to net income.
Step 4: Recognize that the correct calculation for Net Sales is 'Total revenue minus sales returns, allowances, and discounts'. This matches the definition of Net Sales as the revenue after adjustments for returns, allowances, and discounts.
Step 5: Conclude that Net Sales is a key metric for understanding the actual revenue generated from sales activities, excluding any reductions due to returns, allowances, or discounts.
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