This week’s reading covers the breakdown of profit, costs of goods sold and operating expenses, and how accountants can use depreciation to manipulate a company’s financial well-being.
Profit, or “the top line,” is revenue minus costs and expenses. Profit is also referred to as “gross profit,” “operating profit,” “net profit,” and profit per share. This metric is a key number for most companies, as it conveys whether the company’s operations generate future value. If companies are not saving or investing a percentage of their earnings after all expenses are paid, they will remain stagnant or regress.
Costs of Goods Sold (COGS), or “below the line,” measure all the costs directly associated with making the product or delivering the service. Any materials or labor that contributed to forming revenue is considered COGS. Accountants must use their experience and judgment when deciding what is categorized as COGS. For example, even though wages and cost of supplies that directly impacted making the product/service are considered COGS, costs such as office supplies or salaries of people who are not directly involved in creating the product (i.e., Human Resources) are not labeled as COGS. Instead, other costs such as rent, utilities, telephone, research, and marketing are considered “overhead.”
When accountants are measuring the company’s profitability, maximizing their revenues and minimizing costs is in their best interest. Unfortunately, there are ways to use depreciation in fraudulent ways. Companies may depreciate assets much longer than the average
to give investors and other stakeholders the illusion that the company is more profitable than in reality. For instance, a company should only depreciate an asset over the lifetime of the asset. If a garbage truck with a five-year life span is depreciated over 20 years, the company’s costs are
very slim, which gives the false idea that they’re very profitable
Works Cited:
Berman, Karen. “Financial Intelligence, Revised Edition: A Manager’s Guide to Knowing
What the Numbers Really Mean.” Google Play, Google, Jan. 2013,
play.google.com/store/books/details/Karen_Berman_Financial_Intelligence_Revised_Editio?id=
7TfCiz1LkMMC
Created by Mikael La Ferla
Mikael La Ferla 