Which of the following best describes 'Cost of Goods Sold' (COGS) in the context of financial accounting?

• A. The total sales revenue generated from selling goods.
• B. The amount of cash received from customers for goods sold.
• C. The cost of inventory sold to customers during a period.
• D. The cost of goods or services used to operate a business, including administrative expenses.

Answer: (C)

Verified step by step guidance

1. Understand the concept of 'Cost of Goods Sold' (COGS): COGS represents the direct costs associated with producing or purchasing the goods that a company sells during a specific period. It includes costs such as raw materials, labor directly involved in production, and manufacturing overhead.
2. Eliminate incorrect options: The first option, 'The total sales revenue generated from selling goods,' refers to revenue, not COGS. Revenue is the income earned from selling goods or services, while COGS focuses on the cost of producing those goods.
3. Eliminate another incorrect option: The second option, 'The amount of cash received from customers for goods sold,' refers to cash inflows or collections, which is part of cash flow management, not COGS.
4. Focus on the correct definition: The correct answer is 'The cost of inventory sold to customers during a period.' This definition aligns with the purpose of COGS, which is to measure the cost of the inventory that was sold to generate revenue.
5. Clarify the last incorrect option: The final option, 'The cost of goods or services used to operate a business, including administrative expenses,' refers to operating expenses, not COGS. Operating expenses include costs like rent, utilities, and salaries for administrative staff, which are not directly tied to the production of goods.