Multiple Choice
When calculating the departmental overhead rate, which of the following formulas is typically used?
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4. Merchandising Operations
Net Sales
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Which of the following best defines 'Net Sales' on a company's income statement?
A
Total sales revenue minus operating expenses
B
Total sales revenue before any deductions
C
Total sales revenue minus sales returns, allowances, and discounts
D
Total sales revenue minus cost of goods sold
Verified step by step guidance1
Understand the concept of 'Net Sales': Net Sales represents the revenue a company earns from its total sales after deducting sales returns, allowances, and discounts. It is a key metric used to evaluate the actual revenue generated from sales activities.
Identify the components of Net Sales: Net Sales is calculated by subtracting sales returns (products returned by customers), allowances (price reductions for defective goods or services), and discounts (price reductions offered to customers) from the total sales revenue.
Clarify why other options are incorrect: For example, 'Total sales revenue minus operating expenses' refers to operating income, not Net Sales. Similarly, 'Total sales revenue before any deductions' represents gross sales, not Net Sales. Lastly, 'Total sales revenue minus cost of goods sold' refers to gross profit, not Net Sales.
Relate Net Sales to the income statement: On a company's income statement, Net Sales is typically the first line item after adjustments for returns, allowances, and discounts. It serves as the starting point for calculating other financial metrics like gross profit and operating income.
Summarize the correct definition: Net Sales is defined as 'Total sales revenue minus sales returns, allowances, and discounts,' which accurately reflects the revenue a company retains after accounting for these deductions.
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