How does Cost of Goods Sold affect Income. Does it increase or decrease income and by...

How does Cost of Goods Sold affect Income. Does it increase or decrease income and by how much?

Expert Solution

Solution:

Cost of goods sold is the amount that a business pays to sell its products. Purchase price of inventory, freight inwards and other direct costs are included in cost of goods sold. To arrive company's gross profit, Cost of goods sold is reduced from net revenue of the company. Company's net income is derived by reducing operating and other expenses from gross profit.

Hence cost of goods sold affect the income of the company. When cost of goods sold increases (Without affecting sales volume), it decreases income of organization by the amount of increase in cost of goods sold. When cost of goods sold decreases (Without affecting sales volume), it increases income of organization by the amount of decrease in cost of goods sold.

Generally Cost of goods sold changed according to change in sales volume. If COGS increases due to increase in sales volume then it also increase the sales revenue and it may result into increase in net income. Similarly if COGS decreases due to decrease in sales volume then sales revenue also decreases and it may result into decrease in net income.

ekkarill92 answered 1 year ago

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