A Student in the Accounting Principles Course Comes to You

question 35

Essay

A student in the accounting principles course comes to you, an upper-division accounting major, for an explanation of the difference between the gross price and net price methods of recording credit sales.The principles student wants to know why, if there is no difference in net income, a company would prefer one method over the other.
Required:
Explain the basics of each method, how each method is reported on the income statement, and the advantages and disadvantages of each method.

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Definitions:

Operating Expense

Expenditures that a business incurs through its normal business operations.

Operating Profit

Earnings before interest and taxes (EBIT), representing the profit a business makes from its operations.

Selling Price

The amount for which a product or service is sold to the customer.

Unit Cost

The expenditure involved in generating, keeping, or obtaining one unit of a product or service.