Gross sales
Gross sales are the overall trade transactions that are reported within a period. These transactions do not include any deductions. On the other hand, net sales are the gross sales subtracted the following deductions; sales discounts, sale allowances and sales returns.
Net sales are used to calculate the vertical analysis of an income statement because they provide the total overall sales. In vertical analysis, each item on the financial statement is indicated as a percentage of the total sales.
The vertical analysis shows several expenditure lines of items as a percentage of the total sales. For an entrepreneur, the numbers in the vertical report tell them about the trending of their account and also help them see the different changes that happen to the account over some time. The information is valuable for noticing the hiking in expenses or which expenses are unworthy of the company’s attention.
The vertical analysis uses one accounting period to compare the percentages of items in a financial statement, while the horizontal analysis compares the historical data of different accounting periods over several years to analyze a financial statement. Both vertical and horizontal analysis is easy to implement and can be understood quickly. Although one can hire someone to interpret the numbers, these methods are both critical for analyzing the financial statements because they make it easy for a company to create a comparison for its performance over some time. Both analyses can also expose unpredicted differences in the income statement accounts, which would give the company a chance to take action and fix the identified problems. Finally, these techniques benefit the company by helping it identify where they would invest their resources.