Which of the following items is included in the calculation of net sales on an income statement?

• A. Interest income
• B. Operating expenses
• C. Cost of goods sold
• D. Sales returns and allowances

Answer: (D)

Verified step by step guidance

1. Understand the concept of net sales: Net sales represent the revenue generated from sales after deducting sales returns, allowances, and discounts. It is a key figure on the income statement used to assess the company's core revenue-generating activities.
2. Identify the components that affect net sales: Net sales are calculated by subtracting sales returns, allowances, and discounts from gross sales. Other items like interest income, operating expenses, and cost of goods sold are not part of this calculation.
3. Clarify why sales returns and allowances are included: Sales returns refer to products returned by customers, and allowances are reductions in the selling price due to issues like defects. These directly reduce the gross sales figure, making them part of the net sales calculation.
4. Exclude unrelated items: Interest income is part of non-operating income, operating expenses are part of operating costs, and cost of goods sold is part of the calculation of gross profit, not net sales. These items do not impact the net sales figure.
5. Summarize the calculation: To calculate net sales, use the formula: $\mathrm{Net}\mathrm{Sales}=\mathrm{Gross}\mathrm{Sales}-\mathrm{Sales}\mathrm{Returns}-\mathrm{Sales}\mathrm{Allowances}-\mathrm{Discounts}$. Focus on the items directly related to sales activity.