Question

What is typically the largest expense on the income statement of a retail company?

A. Marketing and advertising expenses
B. Employee salaries and benefits
C. Rent and occupancy costs
D. Cost of goods sold

Answer 1

The correct option is D. Cost of goods sold.

The largest expense on the income statement of a retail company is typically Cost of goods sold (COGS), which varies with the level of sales and encompasses direct costs like materials and labor.

Step-by-step explanation:

The largest expense on the income statement of a retail company is typically Cost of goods sold (COGS). COGS represents the direct costs attributable to the production of the goods sold by a company. This includes the cost of the materials used in creating the good along with the direct labor costs used to produce the good. It is considered a variable cost since it fluctuates with the level of output or sales. Unlike fixed costs such as rent, which remains constant regardless of sales volume, COGS increases as sales increase and decreases as sales fall.

In retail, keeping a close eye on COGS is crucial because it directly affects the company's gross margin and profitability. It is important to manage inventory efficiently and negotiate favorable terms with suppliers to optimize COGS. Rent and other fixed costs, while significant, usually do not surpass COGS in a traditional retail business model unless the retail operations are extremely small or have uniquely high rent expenses.