When looking at the income statement for your firm, you notice that your Cost of Goods...

When looking at the income statement for your firm, you notice that your Cost of Goods Sold was $1M in 2012, $1.2M in 2013 and $2M in 2014. How will you determine if there is an issue you should be worried about? What other types of financial statements might you look at to see if there is an issue and why?

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Expert Solution

Absolute increase in Cost of Goods Sold (COGS) is not by itself a red flag. We need to look if sales revenue have increased proportionately (which is good). We need to check if Gross Margin (per unit margin made) is reducing or not before concluding. All these details are in the P&L.

Additionally we may want to look at cash flow statements for any poor signs of working capital (which may increase as COGS increases) as increased working capital may block the capital.

jeff jeffy answered 2 years ago

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