alleryStart learning →Why does a service firm's gross profit equal its net sales?
ABecause it produces no goods to cost
BBecause it pays no operating expenses
CBecause it holds no accounts payable
DBecause it charges no sales discounts
Answer & Solution
Correct answer: A. Because it produces no goods to cost
1. Gross profit is the difference between net sales and cost of goods sold.
2. Service firms do not produce goods, so there is no cost of goods sold to deduct.
3. With nothing to subtract, their gross profit equals net sales.
4. Operating expenses still apply to service firms, so the answer that wipes those out misreads which deduction is missing.
_Source: OpenStax Introduction to Business (CC BY 4.0), Ch 14 "Using Financial Information and Accounting", section 14.5 The Income Statement_
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