There are two forms of income statements that are widely used by merchandising companies: a multiple-step income statement or a simplified income statement. This income statement shows two main steps: cost of goods sold is subtracted from net sales to determine gross profit and operating expenses are deducted from gross profit to determine net income. The multiple-step income statement also distinguishes between operating and non- operating activities. The statement also highlights intermediate components of income and shows subgroupings of expenses. As a contra revenue account, sales returns and allowances is deducted from sales in the income statement to arrive at net sales. Cost of goods sold is deducted from sales revenue to determine gross profit. Sales revenue used from this calculation is net sales. This is done by dividing the amount of gross profit by net sales. Gross profit represents the merchandising profit of a company.