Cost of goods sold

The cost of the goods a company actually sold in the period — materials, labour and production overheads attached to them. It is matched to the revenue those sales produced, not to what was bought.

Where you will meet it

Cost of goods sold appears in 14 learning outcomes on the CFA syllabus. A few of them:

• Explain how a forecast model for a share projects sales, margins, investment and funding
  CFA Level I · Equity Investments

  “Margins come from forecasts of cost of sales and operating expenses, often as percentages of revenue with fixed costs treated separately to capture operating leverage.”

• Set out the parts that make up an income statement
  CFA Level I · Financial Statement Analysis

  “Revenue sits at the top; subtracting cost of goods sold gives gross profit, and subtracting operating expenses gives operating profit.”

• Work out the cash conversion cycle and explain what it shows
  CFA Level I · Corporate Issuers

  “DIO = inventory / COGS x 365, DSO = receivables / revenue x 365 and DPO = payables / COGS x 365.”

• Contrast the current rate and temporal methods, assess the effect of each on the parent's income statement and balance sheet, and decide which method fits a given situation
  CFA Level II · Financial Statement Analysis

  “The temporal method remeasures monetary items at the closing rate and non-monetary items such as inventory and fixed assets at historical rates, with cost of sales and depreciation at those historical rates; the remeasurement gain or loss goes to profit or loss.”

Learn it properly

• Inventory methods: FIFO, LIFO and weighted average compared Guide

Practise it

• Today's practice question One question, with every wrong option explained.
• Free Level I diagnostic test Twelve questions that show which topics to start with.
• Free finance calculators Check your arithmetic on the exam's core formulas.

All terms beginning with C · Glossary