Multiple Choice
Which of the following terms refers to the amount added to the cost of a product to set the selling price?
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4. Merchandising Operations
Net Sales
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Which of the following best describes how 'Net Sales' is calculated on an income statement?
A
Net Sales = Gross Sales + Cost of Goods Sold
B
Net Sales = Gross Sales - Sales Returns and Allowances - Sales Discounts
C
Net Sales = Gross Sales + Sales Returns and Allowances
D
Net Sales = Gross Sales - Operating Expenses
Verified step by step guidance1
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.
Identify the components of Gross Sales: Gross Sales refers to the total sales revenue before any deductions. It is the starting point for calculating Net Sales.
Account for Sales Returns and Allowances: Sales Returns are the refunds given to customers for returned goods, and Allowances are reductions in price due to issues like damaged goods. These amounts must be subtracted from Gross Sales.
Include Sales Discounts: Sales Discounts are reductions in price offered to customers for early payment or other reasons. These also need to be subtracted from Gross Sales to calculate Net Sales.
Combine the formula: The formula for Net Sales is: Net Sales = Gross Sales - Sales Returns and Allowances - Sales Discounts. This ensures all relevant deductions are accounted for in the calculation.
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