Cost of goods sold (COGS)
Cost of goods sold (COGS) is the direct cost of making a company’s products, such as raw materials and the labour tied to production, as BDC defines it. The Canada Revenue Agency uses inventory to work out COGS on Form T2125.
BDC says cost of goods sold appears on an income statement, and writes gross profit as revenue minus COGS; gross profit margin builds on that figure. A buyer meets it when reading the statements of a business that makes products. Adjustments to earnings start from the reported figures: see which add-backs are legitimate.
What it includes and leaves out
BDC counts raw materials, production labour and other direct costs. It leaves out indirect costs such as office expenses, administrative salaries and marketing. BDC adds that businesses that do not make a product, such as retailers and wholesalers, use the term cost of sales for their direct costs. See gross margin.
How the CRA ties it to inventory
The CRA says inventory is used to calculate cost of goods sold and net income on Form T2125, and that the value placed on year-end inventory is important in determining income. It says that, once a valuation method is chosen, the same method must continue to be used in later years; Income Tax Act s.10(2.1) allows another method with the Minister’s concurrence, subject to s.10(6).
What to ask
- Which costs sit in COGS and which in operating expenses?
- How is inventory counted and valued at year-end?
- Has the method changed from year to year?
Sources
This definition is checked against primary sources. Links were last confirmed on the dates shown.
- 01Canada Revenue AgencyGovernmentInventory and cost of goods sold
- 02Business Development Bank of CanadaGovernmentWhat is the cost of goods sold (COGS)
- 03Government of CanadaGovernmentIncome Tax Act, R.S.C. 1985, c. 1 (5th Supp.)
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