# Lesson 5 (Operating Cycle) - What is Cost of Goods...

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What is Cost of Goods Sold (COGS), and where is it reported? How is Gross Profit calculated, and what does it represent? I will be explaining what COGS and how it’s reported. I will also explain how gross profit is calculated and what it represents. (Bragg-2016) Cost of goods sold is the accumulated total of all costs used to create a product or service, which has been sold. These costs fall into the general sub-categories of direct labor, materials, and overhead. In a service business, the cost of goods sold is considered to be the labor, payroll taxes, and benefits of those people who generate billable hours (though the term may be changed to "cost of services"). In a retail or wholesale business, the cost of goods sold is likely to be merchandise that was bought from a manufacturer. The cost of goods is reported on the balance sheet and income statement. In a periodic inventory system, the cost of goods sold is calculated as beginning inventory + purchases - ending inventory. The assumption is that the result, which represents costs no longer located in the warehouse, must be related to goods that were sold. Actually, this cost derivation also includes inventorythat was scrapped, or declared obsolete and removed from stock, or inventory that was stolen. Thus, thecalculation tends to assign too many expenses to goods that were sold, and which were actually costs that relate more to the current period. In a perpetual inventory system, the cost of goods sold is continually compiled over time as goods are sold to customers. This approach involves the recordation ofa large number of separate transactions, such as for sales, scrap, obsolescence, and so forth. If cycle counting is used to maintain high levels of record accuracy, this approach tends to yield a higher degree of accuracy than a cost of goods sold calculation under the periodic inventory system. (Para 1-3)(Kennan-n.d.) The gross profit margin expresses your profits as a percentage of the total sales revenues generated. This percentage allows you to compare the profits of businesses of various sizes because the results are measured as a percentage rather than in raw numbers. However, because