Multiple Choice
Which of the following equations best represents the relationship between net sales and profit?
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4. Merchandising Operations
Net Sales
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Which of the following best describes 'Net Sales' on a company's income statement?
A
Total cash received from customers during the period
B
Total sales revenue minus cost of goods sold
C
Total sales revenue minus sales returns, allowances, and discounts
D
Total sales revenue before any deductions
Verified step by step guidance1
Understand the concept of 'Net Sales': Net Sales represents the total revenue generated from sales after deducting sales returns, allowances, and discounts. It is a key figure on the income statement that reflects the actual revenue earned from sales activities.
Identify the components of Net Sales: Net Sales is calculated by taking the total sales revenue and subtracting any sales returns (products returned by customers), allowances (price reductions for defective goods or services), and discounts (price reductions offered to customers).
Clarify why 'Total cash received from customers during the period' is incorrect: This refers to cash flow, not Net Sales. Net Sales is based on accrual accounting, which includes all sales made during the period, regardless of whether cash was received.
Clarify why 'Total sales revenue minus cost of goods sold' is incorrect: This calculation gives the Gross Profit, not Net Sales. Net Sales is calculated before considering the cost of goods sold.
Clarify why 'Total sales revenue before any deductions' is incorrect: This represents Gross Sales, not Net Sales. Net Sales accounts for deductions such as returns, allowances, and discounts to provide a more accurate measure of sales revenue.
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