Income Statement is the document annually reported by the company to the public. The documents consist of several sections. One of the sections is the cost of goods sold (COGS).
The cost of goods sold (COGS) shows the capital spent by the company to pay the resources, production, and shipment of the products or services.
Defining Cost of Goods Sold
It is basically the total expenses from the purchase price of the raw material to the processes to transform, to pack, and deliver the products from a company. Besides those things, it also represents the total capital that a company pays to its workers who make the products.
Other people may call it to cost of revenue or cost of sales. For instance, if you own a business that produces pizza, then your cost of good sales includes the money you spend to buy the ingredients, like the tomato sauce, flour, and many more.
That cost also covers the capital you use to pay the restaurant vendor and the payment to the soft drink company.
This cost for each company can be different depending on the type of business or where you buy the shares. If you take a look at the advertising group, law firm, and licensing company, you will not find the cost of goods sold.
On the other hand, if you look at typical manufacturing companies you will vividly find the cost of goods sold.
Calculating Cost of Goods Sold and Using it to Evaluate Stocks
The simple formula to calculate it is:
COGS = Beginning Inventory + Additional Inventory – Ending Inventory
COGS figure is important for investors since it owns a direct impact on the company profit. For instance, to know the company’s gross income, you need to deduct this cost out of the company’s total revenue.
That gross profit is an efficient figure that helps you know the efficiency of the company to manage its operation. Consequently, high COGS means lesser profits. In that situation, commonly, the investors will get worried about the company’s overall performance.
