Which of the following best describes the relationship between gross sales and net sales?

• A. Net sales and gross sales are always equal unless there are inventory purchases.
• B. Gross sales are calculated by adding sales returns and allowances to net sales.
• C. Net sales are the total sales before any deductions for returns or discounts.
• D. Net sales are calculated by subtracting sales returns, allowances, and discounts from gross sales.

Answer: (D)

Verified step by step guidance

1. Understand the definitions: Gross sales represent the total revenue generated from sales before any deductions. Net sales are the revenue remaining after subtracting sales returns, allowances, and discounts.
2. Identify the components that affect net sales: 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.
3. Recognize the formula for calculating net sales: Net sales = Gross sales - (Sales returns + Allowances + Discounts). This formula highlights the relationship between gross sales and net sales.
4. Analyze the options provided: Compare each statement to the formula and definitions. For example, the statement 'Net sales are calculated by subtracting sales returns, allowances, and discounts from gross sales' aligns with the formula and is correct.
5. Conclude the relationship: Gross sales represent the starting point, and net sales are derived by deducting specific adjustments (returns, allowances, and discounts) from gross sales.