Which of the following best describes how net sales are calculated on a company's income statement?

• A. Net sales are calculated as total sales plus cost of goods sold.
• B. Net sales are calculated as total sales minus sales returns, allowances, and discounts.
• C. Net sales are calculated as total sales plus sales returns and allowances.
• D. Net sales are calculated as total sales minus operating expenses.

Answer: (B)

Verified step by step guidance

1. Understand the concept of net sales: Net sales represent the revenue a company earns from its total sales after accounting for deductions such as sales returns, allowances, and discounts.
2. Identify the components involved in calculating net sales: Total sales, sales returns, allowances, and discounts are the key elements.
3. Recognize that sales returns refer to products returned by customers, allowances are reductions in price due to defects or other issues, and discounts are reductions in price offered to customers.
4. Apply the formula for net sales: Net Sales = Total Sales - (Sales Returns + Allowances + Discounts).
5. Ensure clarity in the calculation: Subtract the sum of sales returns, allowances, and discounts from the total sales to arrive at net sales.