Multiple Choice
Which statement below accurately describes Hope's net sales?
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4. Merchandising Operations
Net Sales
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Which of the following best describes sales tax in relation to net sales?
A
Sales tax is included in net sales on the income statement.
B
Sales tax increases the reported net sales amount.
C
Sales tax is an expense to the seller and reduces net sales.
D
Sales tax is collected from customers and is not included in net sales revenue.
Verified step by step guidance1
Understand the concept of sales tax: Sales tax is a percentage-based tax collected by businesses on behalf of the government when selling goods or services. It is not revenue for the business but rather a liability owed to the government.
Clarify the relationship between sales tax and net sales: Net sales represent the revenue earned by the business from selling goods or services, excluding any taxes collected. Sales tax is not part of net sales because it is not income for the business.
Analyze the options provided: Evaluate each statement to determine its accuracy based on the definition and treatment of sales tax in financial accounting.
Identify the correct statement: The correct answer is the one that aligns with the principle that sales tax is collected from customers and recorded as a liability, not as part of net sales revenue.
Conclude the reasoning: Sales tax is excluded from net sales because it does not represent earnings for the business. Instead, it is a separate amount collected and remitted to the government.
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