What Is Important of Net Sales in Stocks

Net sales are the amount between the company's gross sales of its returns, allowances, and rebates. Net sales calculations are not always externally transparent. They can often be implicated in reporting top-line revenue reported on income statements.

An income statement is a financial report primarily used when analyzing a company's revenue, revenue growth, and operating expenses. The income statement is divided into three parts that support analysis of direct costs, indirect costs, and capital costs. The direct cost portion of the income statement is where net sales can be found.

Companies cannot provide too much external transparency in the area of ​​net sales. Net sales may not apply to every company and industry due to the different components of its calculation. Net sales minus revenue are the result of applicable sales returns, allowances, and rebates. Costs associated with net sales will affect a company's gross profit and gross profit margin but net sales do not include the cost of goods sold that are usually a primary driver of gross profit margin.

If a business has any returns, allowances or discounts, an adjustment is made to identify and report net sales. Companies can report gross sales, then net sales, and the cost of sales in the direct cost portion of the income statement or they can only report net sales on the top line and then move on to the costs of goods sold.

Net sales do not account for the cost of goods sold, general expenses and administrative expenses, which are analyzed with various effects on income statement margins.

How to affect the cost of net sales

Gross sales are the total unfair sales of a company. For companies using accounting, they are booked when a transaction occurs. For companies using cash accounting, they are booked on receipt of cash.

Some companies may not have a cost that requires a net sales calculation but many companies do. Sales returns, allowances, and rebates are the three main costs that can affect net sales.

All three costs should generally be eliminated after the company's book revenue.

Thus, to ensure proper performance analysis, each such cost has to be accounted for on the financial reporting of a company.

Returns

Sales returns are common in retail trade. These companies allow a buyer to return an item within a few days for a full refund. This can cause some complexity in financial statement reporting.

Companies that allow sales returns should provide a refund to their customer. A sales return is usually in the form of expenses. As such it debits a sales return liability account on the balance sheet and credits an asset account. This expense bears the income statement as net sales cost which reduces revenue.

In many cases, a sales return can be made again. This requires a company to make additional marking for the item as a list.

Discounted Price

Many companies working on an invoice basis will offer discounts to their buyers if they pay their bills early.

An example of exemption terms would be one where a customer gets a 1% discount if they make a payment within 10 days of a 30-day invoice.

Sellers do not account for discounts until a customer makes an early payment, so they must be retroactive.

Allowances

Allowances are less common than returns but can arise if a company negotiates to reduce already booked revenue. If a buyer complains that the goods were damaged in transportation or that the wrong goods were shipped in order, a seller may provide the buyer with a partial refund.

In this case, the same type of notation would be required.

A seller will be required to debit an expense account and credit an asset account. This expenditure goes to the income statement to reduce the value of revenue.

 

Net sales allowances are usually different from write-offs which may also be known as allowances. The write-off is an expense debit that reduces asset inventory value. Companies adjust for write-offs or write-downs on inventory due to loss or damage. These write-offs occur before a sale occurs.

Considerations for Net Sales

If a company provides full disclosure of its gross sales versus net sales it may be of interest for external analysis.

If the difference between gross and net sales of a company is higher than the average of the industry, the company may offer higher discounts than industry competitors or receive an excessive amount of returns.

Companies will usually try to maintain or beat the industry average. Often returns can be remodeled quickly without creating issues.

Allowances are usually the result of transportation to problems that may prompt a company to review its shipping strategy or storage methods.

Companies offering discounts can reduce or increase their discount conditions to become more competitive within their industry.