Page 97 - Finance for Non-Financial Managers

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Finance for Non-Financial Managers
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Cost of goods sold (COGS or CGS) A common varia-
tion on the cost of sales concept discussed in Chapter 4,
cost of goods sold represents all the costs of manufacturing
or buying the products sold during the month, including raw materials,
manufacturing labor, and related overhead costs, but excluding the
directly related selling costs that are a part of cost of sales. Figure 4-2,
which you saw earlier, showed how the two terms differ in their calcu-
lation. Depending on which approach a company takes, its gross profit
and gross margin percentage will be slightly different, although operat-
ing profit will be the same in either case.
Companies that purchase and resell goods rather than manufactur-
ing the products they sell will for the most part report the cost of
purchased goods on this line rather than accumulating raw materials
and direct labor.
To add to the terminology collection, companies that sell services
rather than products will usually report this line as cost of services
rather than cost of sales.This subtle distinction has lost ground in
recent years as some service companies have dispensed with the term
altogether, opting instead to simply report revenues, operating expens-
es, and operating profit.
ished goods to customers before they had even paid their sup-
pliers for the raw materials that went into the product. They
would have recorded as expenses the costs of those goods,
commonly called cost of goods sold (see Chapter 4), even
though they had not yet written a check to pay for the materi-
als. This would have postponed paying, but not delayed record-
ing costs in their income statement. Thus, costs would appear
on their income statement even though no cash had left their
bank account.
Type 3. Transactions That Put Cash in the Bank but Don’t
Help Your Profits Until Later—if at All
Cash flow means everything that affects your bank balance.
That includes sources of cash that might never impact profits.
Consider the effect of going to the bank to borrow money. You
get the loan, put the money into your bank account, and thus
experience positive cash flow. Yet there is no change in your