Which of the following best describes the effect of a cash discount taken by the customer on net sales?

• A. It has no effect on net sales.
• B. It is recorded as an operating expense.
• C. It reduces net sales by the amount of the discount.
• D. It increases net sales by the amount of the discount.

Answer: (C)

Verified step by step guidance

1. Understand the concept of a cash discount: A cash discount is a reduction in the invoice price offered by the seller to the buyer for prompt payment. It is typically recorded as a deduction from sales revenue.
2. Recognize the relationship between cash discounts and net sales: Net sales are calculated as gross sales minus sales returns, allowances, and discounts. A cash discount reduces the gross sales amount, thereby reducing net sales.
3. Analyze the options provided: The correct answer should align with the definition of net sales and the impact of cash discounts. A cash discount does not increase net sales, nor is it recorded as an operating expense. It directly reduces net sales.
4. Apply the accounting principle: When a customer takes a cash discount, the seller records the discount as a reduction in sales revenue, which decreases the net sales figure.
5. Conclude the reasoning: Based on the explanation, the correct answer is that a cash discount taken by the customer reduces net sales by the amount of the discount.