Cost of sales are costs that are directly related to creating the products that a reporting entity sells, or providing the service that generates service revenue. Costs may include direct costs, such as labor and raw materials, or indirect costs, such as machinery depreciation, warehouse utilities, stock-based compensation, and amortization of intellectual property intangible assets. Judgment is required to determine which costs should be allocated to cost of sales compared to other expense categories. Reporting entities should be consistent in their allocation methodology to ensure all periods presented are comparable.

Although cost of sales is often one of the more material income statement line items, there are minimal associated presentation and disclosure requirements. However, as previously discussed, the costs and expenses related to each revenue category must be reflected separately in the income statement.