Explanation of Cost of Goods Sold:

Also called the Cost of Sales and listed on the Income Statement, the Cost of Goods Sold is the cost to the company the products or services they sell.  The Cost of Goods Sold is typically the first item under Net Sales on the Income Statement. 

Importance of Cost of Goods Sold:

The Cost of Goods Sold typically is the largest single expense for most companies, so this figure is extremely important.  This figure alone is really of much value, as it needs to be compared to other financial figures, such as Net Sales or Inventory.  An especially sign for a company is if the Net Sales is increasing over time, and the Cost of Goods Sold is not increasing as much, staying the same, or the best case - going down!  This could mean that while its sales income is increasing, it is able to manage its costs associated with selling those goods or services. 

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