Financial Accounting

Word has gotten around that you know accounting and can explain it well.  Jim, another of your friends has a unique business.  During the summer he buys hats that cost $5.00 each and sells them at the beach for $12.00 each.  Other than the cost of the hat, his only other expense last summer was $120 for parking.  He sold 78 hats last summer.  His accountant prepared a financial statement for him and he has several questions about the income statement.  He asks:

1. What does the cost of goods sold and gross profit mean?
2. How much gross profit do I make on each hat?
3. Why show both gross profit and net income?

If I have hats returned or a give a discount, how will that be shown on the income statement?