Canadian Securities Course (CSC) Level 1 Practice Exam

How do revenue and cost of sales relate to each other?

1. Cost of sales are generated from interest income.

2. Revenue is the cost of producing goods sold.

3. Revenue is income from sales while cost of sales are production expenses.

4. Cost of sales are profits from sales transactions.

The correct answer is: Revenue is income from sales while cost of sales are production expenses.

The relationship between revenue and cost of sales is best reflected in the understanding that revenue represents the income generated from sales of goods or services, while cost of sales refers to the direct costs incurred in producing those goods or services sold. When a company sells a product, the revenue they earn is essentially the total sales amount received from those transactions. On the other hand, the cost of sales, also known as cost of goods sold (COGS), includes all the costs directly tied to that production process, such as raw materials, labor, and manufacturing overhead. This distinction is crucial for assessing a company's profitability. By comparing revenue to cost of sales, a business can determine its gross profit, which is a key indicator of financial health. Understanding this balance helps in analyzing a company's operational efficiency and pricing strategies. The other options either misconstrue the definitions or do not accurately represent the financial concepts involved. For instance, cost of sales does not arise from interest income, nor is revenue categorized as a cost. Additionally, profits from sales transactions should derive from revenue minus costs, rather than being described as cost of sales. Hence, the correct interpretation encapsulated in the answer provided effectively captures the essential financial relationship between these two elements.