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Cost of Goods Purchased Provides More Realistic Outlook on Health of Retail Business By Ritchie Sayner Advanced Retail Strategies When reviewing a profit and loss statement, one of the traditional
Not to complicate issues, but it needs to be stated that varying
benchmarking metrics is Cost of Goods Sold (COGS). What exactly is
accounting methods will have a bearing on COGS. FIFO (first in,
COGS anyway? Also referred to as Cost of Sales, COGS is just what it
first out) and LIFO (last in, first out) are the most widely accepted
says it is, the cost of all of the inventory sold during a given period.
accounting methods and FIFO is the most trusted and easiest to
Paul Erickson, a colleague of mine at Management One, describes
use. Simply stated FIFO assumes items purchased first, were also
COGS as “the most misleading metric in retail.” He prefers to use Cost of Goods Purchased (COGP) as it more directly relates to cash flow and thus the financial health of the business. COGP is determined
the items sold first. LIFO (last in, first out) on the other hand, would recognize that items purchased last, would be the ones sold first. Whichever method you use, know that there will be a difference
by simply subtracting purchases from sales for the same period.
in profits and therefore income taxes.
Erickson’s claim is using COGS can provide a retailer with a somewhat
Although clearly not recognized by generally accepted accounting
unhealthy financial perspective since selling very little at full price
practices, this is where the FISH (first in, still here) accounting
can result in a very good COGS. Using COGP, on the other hand,
method comes in to play. I see this all too often.
relates purchases directly back to cash flow.
Has this ever happened to you? A style or styles gets purchased,
The following example illustrates the difference between the two.
generally with no regard to the merchandise plan, gets put on the
Let’s assume you bought a new style of 50 pairs of hockey skates for the current season. After four months you were only able to sell 5 pairs of the skates, but they all sold at full price. Your Cost Of Goods Sold (COGS) would be excellent since the cost of selling the skates did not require any discounting to generate the sales. Herein lies the problem … you still have 45 pairs you have already paid for remaining in unsold inventory. The Cost Of Goods Purchased (CODP) in this example, would paint a much different picture and it wouldn’t be pretty. 8 | NSGA NOW ®
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“wall” amidst the rest of the assortment and ends up getting lost. The style doesn’t sell as it should, and for reasons unknown to all does not get returned or marked down. The result is — COGS-excellent, COGP-horrible! The lifeblood of any retail establishment is cash flow and COGS does not take that into account. To add insult to injury, if the item is still in the store at inventory time, you get to pay taxes on merchandise that shouldn’t have been bought in the first place and should have been either stock balanced with the vendor or marked down. This is what is meant by the FISH method of accounting.
