Which of the following best describes how net sales are calculated on the income statement?

• A. Net sales = Gross sales + Sales returns and allowances
• B. Net sales = Gross sales - Sales returns and allowances - Sales discounts
• C. Net sales = Gross sales - Operating expenses
• D. Net sales = Gross sales + Cost of goods sold

Answer: (B)

Verified step by step guidance

1. Understand the concept of net sales: Net sales represent the revenue generated from sales after accounting for deductions such as sales returns, allowances, and discounts.
2. Identify the components involved in calculating net sales: Gross sales, sales returns and allowances, and sales discounts.
3. Recognize that gross sales represent the total sales revenue before any deductions.
4. Subtract sales returns and allowances from gross sales. Sales returns refer to products returned by customers, and allowances are reductions in price due to issues like damaged goods.
5. Subtract sales discounts from the result obtained in the previous step. Sales discounts are reductions in price offered to customers for early payment or other reasons. The formula for net sales is: $\mathrm{Net}\mathrm{Sales}=\mathrm{Gross}\mathrm{Sales}-\mathrm{Sales}\mathrm{Returns}-\mathrm{Allowances}-\mathrm{Sales}\mathrm{Discounts}$.