In a multi-step income statement, where is the cost of goods sold shown?

• A. In the cash flow statement
• B. In the non-operating section
• C. On the balance sheet
• D. In the operating section, as part of the calculation of gross profit

Answer: (D)

The main idea here is that cost of goods sold relates to the core operating activities of selling goods. In a multi-step income statement, net sales minus the cost of goods sold yields gross profit, so COGS is shown as a deduction that helps arrive at gross profit. That placement sits in the operating section because it directly ties to the company’s regular business of purchasing and selling inventory. It’s not part of the cash flow statement, which tracks actual cash movements, nor the balance sheet (except for the inventory that eventually becomes COGS), and it isn’t in the non-operating section, which covers items not tied to normal operations.