Multiple Choice
Which of the following best describes how 'Net Sales' is calculated on a company's income statement?
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4. Merchandising Operations
Net Sales
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Which of the following financial metrics best measures how profitable a firm has been during a period?
A
Net Income
B
Gross Profit
C
Net Sales
D
Total Assets
Verified step by step guidance1
Understand the concept of profitability: Profitability measures how effectively a company generates profit relative to its revenue or assets during a specific period.
Review the financial metrics provided: Net Income, Gross Profit, Net Sales, and Total Assets. Each metric serves a different purpose in financial analysis.
Define Net Income: Net Income is the total profit a company earns after deducting all expenses, including operating costs, taxes, and interest. It is a direct measure of profitability.
Define Gross Profit: Gross Profit represents the difference between Net Sales and the Cost of Goods Sold (COGS). While it indicates the efficiency of production and sales, it does not account for other expenses like taxes or interest.
Compare the metrics: Net Income is the most comprehensive measure of profitability because it accounts for all expenses and provides a clear picture of how profitable the firm has been during the period.
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