Multiple Choice
Which of the following best defines 'Net Sales' on a company's income statement?
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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 the 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 - Salaries Expense
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 from sales activities.
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.
Subtract Sales Returns and Allowances: Sales Returns are the refunds given to customers for returned goods, and Allowances are reductions in price due to product defects or other issues. These amounts reduce the total revenue earned.
Subtract Sales Discounts: Sales Discounts are reductions in price offered to customers for early payment or other promotional reasons. These also reduce the total revenue earned.
Combine the deductions: The formula for Net Sales is: . This calculation ensures that Net Sales reflects the actual revenue after accounting for all relevant deductions.
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