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Multiple Choice
Which of the following is a true statement about net sales?
A
Net sales are calculated by subtracting sales returns, allowances, and discounts from total sales.
B
Net sales are reported as an expense on the income statement.
C
Net sales include only cash sales and exclude credit sales.
D
Net sales are the same as gross sales before any deductions.
Verified step by step guidance
1
Understand the concept of net sales: Net sales represent the revenue earned by a company after accounting for deductions such as sales returns, allowances, and discounts. It is a key figure used to assess the company's actual revenue from sales activities.
Identify the formula for calculating net sales: Net sales are calculated using the formula: . This formula highlights the deductions applied to total sales to arrive at net sales.
Clarify the reporting of net sales: Net sales are reported as a revenue figure on the income statement, not as an expense. It is typically one of the first line items in the income statement, reflecting the company's earnings from its core operations.
Distinguish between gross sales and net sales: Gross sales represent the total sales before any deductions, while net sales account for reductions due to returns, allowances, and discounts. Net sales provide a more accurate picture of the company's actual revenue.
Address the inclusion of credit sales: Net sales include both cash sales and credit sales. The distinction between cash and credit sales does not affect the calculation of net sales, as both are part of total sales before deductions.