Which of the following would decrease net sales on a company's income statement?

• A. An increase in gross sales
• B. A decrease in cost of goods sold
• C. An increase in operating expenses
• D. An increase in sales returns and allowances

Answer: (D)

Verified step by step guidance

1. Understand the concept of net sales: Net sales is calculated as gross sales minus sales returns, allowances, and discounts. It represents the actual revenue a company earns from its sales after accounting for these deductions.
2. Analyze the impact of an increase in gross sales: An increase in gross sales would increase net sales, not decrease it, assuming all other factors remain constant.
3. Analyze the impact of a decrease in cost of goods sold: Cost of goods sold (COGS) affects gross profit, not net sales. A decrease in COGS would increase gross profit but has no direct impact on net sales.
4. Analyze the impact of an increase in operating expenses: Operating expenses are deducted after calculating gross profit and do not directly affect net sales. Therefore, an increase in operating expenses does not decrease net sales.
5. Analyze the impact of an increase in sales returns and allowances: Sales returns and allowances are subtracted from gross sales to calculate net sales. An increase in sales returns and allowances would decrease net sales, as it reduces the total revenue earned from sales.