Which of the following best describes what is typically included in the calculation of net sales on a company's income statement?

• A. Net income plus operating expenses
• B. Gross sales plus cost of goods sold
• C. Gross profit minus operating expenses
• D. Gross sales minus sales returns, allowances, and discounts

Answer: (D)

Verified step by step guidance

1. Understand the concept of net sales: Net sales represent the revenue a company earns from its sales activities after accounting for deductions such as sales returns, allowances, and discounts.
2. Identify the components of gross sales: Gross sales refer to the total revenue generated from sales before any deductions are applied.
3. Recognize the deductions applied to gross sales: Sales returns are refunds for returned goods, allowances are reductions in price due to defects or issues, and discounts are reductions in price offered to customers.
4. Apply the formula for net sales: Net sales = Gross sales - (Sales returns + Allowances + Discounts). This formula ensures that the income statement reflects the actual revenue earned after adjustments.
5. Relate the formula to the income statement: Net sales are typically the first line item on the income statement, serving as the starting point for calculating gross profit and other financial metrics.