What does the cost of goods sold (COGS) represent?

• A. The total revenue of the business
• B. The total assets of the business
• C. The difference between net income and expenses
• D. The cost of inventory that was sold during a period

Answer: (D)

COGS represents the cost tied to the inventory that was actually sold during the period. It includes what you paid for the goods and any direct costs to bring them to the saleable condition (and, for manufacturers, direct production costs). On the income statement, COGS is subtracted from revenue to give gross profit, reflecting the matching of costs with the revenues those goods helped generate. For example, if you start with 5 units at $10 each, buy 15 more, and end with 8 units, COGS = (5 + 15 − 8) × $10 = 12 × $10 = $120. If revenue from selling the goods was $200, gross profit would be $80. COGS is not the total revenue, not the total assets, and not the difference between net income and expenses.