Which of the following is NOT included in the calculation of net sales on a company's income statement?

• A. Sales returns and allowances
• B. Sales discounts
• C. Cost of goods sold
• D. Gross sales

Answer: (C)

Verified step by step guidance

1. Understand the concept of net sales: Net sales represent the revenue generated by a company after deducting certain items from gross sales. These deductions typically include sales returns and allowances, and sales discounts.
2. Identify the components included in the calculation of net sales: Gross sales is the starting point, and adjustments are made for sales returns and allowances (refunds or reductions for defective or unsatisfactory goods) and sales discounts (reductions offered for early payment or other incentives).
3. Recognize that cost of goods sold (COGS) is not part of the net sales calculation: COGS refers to the direct costs of producing goods sold by the company, such as materials and labor. It is subtracted later in the income statement to calculate gross profit, not net sales.
4. Clarify the distinction between net sales and gross sales: Gross sales represent the total revenue before any deductions, while net sales are the adjusted figure after accounting for returns, allowances, and discounts.
5. Conclude that cost of goods sold is excluded from the calculation of net sales because it is part of the expense section of the income statement, not the revenue section.