Final answer:
It is true that sales returns and allowances, and sales discounts, are subtracted from gross sales to determine net sales on an income statement. These adjustments reflect the actual revenue after accounting for returned products and price reductions. Calculating net sales is essential for accurately reporting a company's revenue.
Step-by-step explanation:
The statement that sales returns and allowances and sales discounts are subtracted from sales to report net sales in the income statement is actually true. When a business reports its financial performance, the total gross sales need adjustments to reflect the real revenue that the business will retain. After calculating gross sales, the company subtracts sales returns and allowances—money refunded to customers for the return of products or compensation for unsatisfactory products—as well as sales discounts—reductions in price given to customers for early payments or other promotions—to arrive at net sales. This adjusted figure is a more accurate representation of the money a business effectively earns from its sales activities, and it's crucial for assessing the company's performance.
For example, if a company has total revenues of $200,000 and explicit costs of $85,000, subtracting these costs from the revenues yields an accounting profit of $115,000. However, if this revenue includes gross sales, one must account for any sales returns, allowances, and discounts before declaring the final net sales and subsequently the accurate accounting profit. Sales taxes, which are typically a percentage imposed on firms' sales, don't directly factor into the calculation of net sales but affect the overall cost to the consumer and are collected to be remitted to the government.