Multiple Choice
Which of the following is NOT true about net operating cash flow?
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4. Merchandising Operations
Net Sales
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What is the financial impact on a company when a customer returns a product for a refund?
A
Net income increases by the amount of the refund.
B
Net sales increase by the amount of the refund.
C
Net sales decrease by the amount of the refund.
D
Net sales remain unchanged, but expenses increase.
Verified step by step guidance1
Understand the concept of net sales: Net sales represent the total revenue generated from sales after deducting returns, allowances, and discounts. When a customer returns a product for a refund, it directly impacts net sales.
Analyze the financial impact of a product return: A product return results in a reduction of revenue because the company refunds the customer. This refund decreases the net sales figure, as the revenue from the original sale is reversed.
Clarify why net income does not increase: Net income is calculated as total revenue minus expenses. A refund does not increase net income; instead, it reduces revenue, which may lead to a decrease in net income depending on the company's overall expenses.
Explain why net sales decrease: When a refund is issued, the amount of the refund is subtracted from the company's total sales revenue, leading to a decrease in net sales. This is the correct financial impact of a product return.
Highlight why expenses do not increase: A refund does not increase expenses directly; it reduces revenue. Expenses remain unchanged unless additional costs are incurred to process the return, which is not specified in this scenario.
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