Net revenues (net sales) is calculated as total revenues minus which of the following items?

• A. Operating expenses
• B. Sales returns, sales allowances, and sales discounts
• C. Interest expense
• D. Cost of goods sold

Answer: (B)

Verified step by step guidance

1. Understand the concept of net revenues (net sales): Net revenues represent the actual income generated from sales after accounting for certain deductions. It is a key metric used to evaluate the effectiveness of a company's sales operations.
2. Identify the deductions that are subtracted from total revenues to calculate net revenues: These deductions typically include sales returns, sales allowances, and sales discounts. These items reduce the gross revenue to reflect the actual revenue earned.
3. Clarify the meaning of sales returns, sales allowances, and sales discounts: Sales returns refer to goods returned by customers, sales allowances are reductions in price due to product defects or other issues, and sales discounts are reductions in price offered to customers for early payment or promotional purposes.
4. Differentiate net revenues from other financial metrics: Operating expenses, interest expense, and cost of goods sold are not subtracted to calculate net revenues. These items are accounted for in other parts of the income statement, such as operating income or net income.
5. Summarize the formula for net revenues: Net revenues = Total revenues - (Sales returns + Sales allowances + Sales discounts). This formula ensures that the reported revenue reflects the actual income generated from sales transactions.