Which statement about cost of goods sold (COGS) is true for a merchandising company?

• A. COGS is recorded for all businesses.
• B. COGS is not used in calculating gross margin.
• C. COGS is recorded only when inventory is sold at a loss.
• D. COGS is recorded for the merchandiser and is included in gross margin calculation.

Answer: (D)

In a merchandising company, cost of goods sold (COGS) is the cost of the inventory that was sold during the period. It’s crucial for figuring gross margin, because gross margin equals net sales minus COGS. When inventory is sold, the business records the cost as an expense by moving it from Inventory to COGS (a debit to COGS and a credit to Inventory). This reduces assets and reflects the expense tied to the sale, and that COGS figure is what is subtracted from sales to determine gross profit.

COGS is included in the gross margin calculation specifically for merchandisers because their core activity involves selling goods they purchased or produced. The other statements don’t fit: not every business incurs COGS (service-only or non-inventory businesses may not have this expense); COGS is essential for calculating gross margin; and COGS is recorded whenever inventory is sold, not only when a sale occurs at a loss.