COGS Basics
What does COGS stand for ?
Cost of goods sold
What is the basic structure of the COGS formula?
Beginning Inventory + Purchases – Ending Inventory
Name one type of business that commonly uses COGS.
Retail, mainly sales of goods
What financial statement is COGS found on?
Income Statement
What types of expenses are included in COGS?
Direct costs like raw materials, labor, and production-related expenses
In the full COGS formula, what does “Freight In” refer to?
The cost of transporting goods to the business (not to customers)
Why don’t software companies typically use COGS?
Because they don’t sell physical goods—they record operating expenses instead
: How does COGS affect gross profit?
Gross Profit = Revenue – COGS
Why is COGS classified as an expense and not an asset?
Because it represents the cost used to generate revenue, not something the business owns
Calculate COGS: Beginning Inventory = $300, Purchases = $500, Purchase Returns = $50, Freight In = $20, Ending Inventory = $150
COGS = 300 + 500 – 50 + 20 – 150 = $620
A furniture company starts the month with $1,000 in inventory, buys $700 more, gets $100 in purchase returns, pays $50 in freight, and ends with $800 in inventory. What is the COGS?
1000 + 700 – 100 + 50 – 800 = $850
Why is tracking COGS important for a business’s long-term success?
It helps manage profitability, make pricing decisions, and evaluate business performance