Multiple Choice
Which of the following best describes 'Net Sales' in financial accounting?
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4. Merchandising Operations
Net Sales
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Which of the following equations best represents the relationship between net sales and profit?
A
Profit = Net Sales - Operating Expenses + Cost of Goods Sold
B
Profit = Net Sales \times Cost of Goods Sold
C
Profit = Net Sales + Cost of Goods Sold + Operating Expenses
D
Profit = Net Sales - Cost of Goods Sold - Operating Expenses
Verified step by step guidance1
Understand the components of the profit equation: Profit is calculated as the difference between revenue (Net Sales) and the expenses incurred to generate that revenue, which include Cost of Goods Sold (COGS) and Operating Expenses.
Analyze the given options: Each equation represents a different relationship between Net Sales, Cost of Goods Sold, and Operating Expenses. Compare these equations to the standard formula for profit calculation.
Recall the standard formula for profit: Profit = Net Sales - Cost of Goods Sold - Operating Expenses. This formula accounts for all expenses deducted from revenue to determine the profit.
Evaluate the incorrect options: The first option incorrectly adds Cost of Goods Sold instead of subtracting it. The second option multiplies Net Sales by Cost of Goods Sold, which is not a standard accounting practice. The third option adds all components together, which does not reflect the deduction of expenses.
Select the correct equation: Based on the standard formula, the correct equation is Profit = Net Sales - Cost of Goods Sold - Operating Expenses, as it accurately represents the relationship between net sales and profit.
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