DECA Retail Merchandising Practice Exam

What does cost of goods sold (COGS) represent for a retailer?

1. The total revenue earned

2. The amount received from sales

3. The amount paid for merchandise

4. The retailer's operating expenses

The correct answer is: The amount paid for merchandise

Cost of goods sold (COGS) represents the amount paid for merchandise that a retailer sells during a specific period. This figure includes all the direct costs associated with the production of goods that a retailer purchases for resale, such as purchase price, shipping costs, and any other expenses directly linked to the acquisition of inventory. Understanding COGS is crucial for calculating gross profit, as it indicates how much money is tied up in the goods sold, directly impacting the profitability of the retailer. The other options focus on different financial metrics. Total revenue refers to the entire income generated from sales before any expenses are deducted. The amount received from sales is essentially the same as revenue, representing money that flows into the business from customers. Retailers' operating expenses include overhead costs such as salaries, rent, and utilities, which are not tied directly to the cost of merchandise. Thus, COGS specifically encapsulates the direct costs incurred to produce or acquire the goods that are sold, distinguishing it from these other financial figures.