Which of the following best describes how 'Net Sales' is calculated on an income statement?

• A. Gross sales minus cost of goods sold
• B. Net income minus operating expenses
• C. Gross sales plus cost of goods sold
• 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 represents the revenue generated from sales after accounting for deductions such as sales returns, allowances, and discounts. It provides a clearer picture of the actual revenue earned from sales activities.
2. Identify the components of Gross Sales: Gross Sales refers to the total sales revenue before any deductions. It includes all sales transactions made during a specific period.
3. Recognize the deductions: Sales returns are the value of goods returned by customers, allowances are reductions in price due to issues like damaged goods, and discounts are reductions offered to customers for early payment or promotional purposes.
4. Apply the formula for Net Sales: The formula is Net Sales = Gross Sales - (Sales Returns + Allowances + Discounts). This formula ensures that all deductions are subtracted from the gross sales to arrive at the net sales figure.
5. Relate the formula to the income statement: On the income statement, Net Sales is typically the first line item under the revenue section, and it serves as the starting point for calculating other financial metrics like gross profit and net income.