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COGS

Moneyzine Editor
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Moneyzine Editor
1 mins
January 11th, 2024
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COGS

Definition

An abbreviation for the cost of goods sold, COGS are the direct expenses associated with making a product or supplying a service. Typical expenses include direct labor and raw materials. Companies report the cost of goods sold on the income statement.

Calculation

If a company keeps an inventory, product, or raw materials on hand, then the cost of goods sold needs to account for changes to beginning and ending inventories. The cost of goods sold is calculated as follows:

Goods Available for Sale = Starting Inventory + Additions to Inventory

Cost of Goods Sold = Goods Available for Sale - Ending Inventory

Explanation

COGS should represent the actual cost to make a product; therefore, it will not include indirect expenses such as research and development or selling, general and administrative expense (SGA). The COGS is an important value because it's often used when calculating efficiency ratios such as gross profit margins.

Cost of goods sold typically appears as the first expense on the income statement, appearing just below revenues (sales).

Related Terms

  • Income Statement
    The income statement is a financial accounting report that demonstrates how net income, or profit, is derived from revenues. The main categories appearing on an income statement include revenues, cost of goods sold, operating expenses, non-recurring items and net income.
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  • Gross Profit
    The financial accounting term gross profit is used to describe a subtotal line item appearing on the income statement. Gross profit is the money left over after the cost of goods sold (COGS) is subtracted from revenues.
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  • Inventory Turnover
    The inventory turnover ratio tells the analyst how well a company manages its inventory. This metric requires data from both the income statement (revenues) and balance sheet (inventory).
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    Moneyzine Editor
    January 22nd, 2024

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