What does the term "Cost of Goods Sold" refer to?

The term "Cost of Goods Sold" (COGS) specifically refers to the total cost of purchasing or manufacturing the goods that a company sells during a specific period. This includes all costs directly tied to the production or acquisition of those goods, such as raw material costs, direct labor involved in production, and any direct overhead costs associated with creating or preparing the goods for sale.

Understanding COGS is crucial for determining a company's gross profit, which is calculated by subtracting COGS from total revenue. Accurate measurement of COGS helps businesses manage inventory and understand profitability, making it a key component in financial statements.

In contrast, the other options relate to expenses that do not directly influence the cost of the products sold. Advertising costs, administrative expenses, and employee salaries—if not directly tied to the goods sold—are categorized differently within financial reporting, typically considered operating expenses rather than COGS.