Multiple Choice
Employee regular earnings are calculated as:
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4. Merchandising Operations
Net Sales
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Which of the following scenarios would most likely result in a negative net income for a company?
A
The company records a gain on the sale of an asset.
B
Total expenses exceed total revenues for the period.
C
Net sales are higher than cost of goods sold and operating expenses.
D
The company receives a large cash advance from a customer.
Verified step by step guidance1
Step 1: Understand the concept of net income. Net income is calculated as total revenues minus total expenses for a given period. If total expenses exceed total revenues, the result is a negative net income.
Step 2: Analyze the first scenario: 'The company records a gain on the sale of an asset.' A gain on the sale of an asset increases revenue, which would typically contribute positively to net income rather than result in a negative net income.
Step 3: Analyze the second scenario: 'Total expenses exceed total revenues for the period.' This directly aligns with the definition of negative net income, as expenses surpassing revenues would result in a loss.
Step 4: Analyze the third scenario: 'Net sales are higher than cost of goods sold and operating expenses.' If net sales exceed costs and expenses, the company would generate a profit, not a negative net income.
Step 5: Analyze the fourth scenario: 'The company receives a large cash advance from a customer.' A cash advance is a liability and does not directly impact net income, as it is not considered revenue until earned. Therefore, this scenario would not result in a negative net income.
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