Multiple Choice
Why is it important for a business to have a high gross margin?
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4. Merchandising Operations
Net Sales
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Which of the following is subtracted from total sales to calculate net sales on the income statement?
A
Sales returns and allowances
B
Depreciation expense
C
Cost of goods sold
D
Interest expense
Verified step by step guidance1
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.
Identify the components that are subtracted from total sales to calculate net sales: Sales returns and allowances are reductions in revenue due to returned goods or price adjustments.
Clarify why other options are not subtracted: Depreciation expense, cost of goods sold, and interest expense are not directly related to the calculation of net sales. These are accounted for in other sections of the income statement.
Relate the calculation to the income statement structure: Net sales are calculated before considering expenses like cost of goods sold, depreciation, and interest. This ensures the revenue figure reflects only the actual sales revenue after adjustments.
Summarize the process: To calculate net sales, subtract sales returns and allowances (and any discounts, if applicable) from total sales revenue.
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