Multiple Choice
In the profit equation, what is multiplied by the quantity sold to determine total revenue before deducting costs?
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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 - Operating Expenses
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 + Cost of Goods Sold
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 are subtracted from Gross Sales.
Include Sales Discounts: Sales Discounts are reductions in price offered to customers for early payment or other promotional reasons. These are also subtracted from Gross Sales.
Combine the deductions: The formula for Net Sales is: Net Sales = Gross Sales - Sales Returns and Allowances - Sales Discounts. This ensures all relevant deductions are accounted for to arrive at the Net Sales figure.
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