A Wrench in the COGS: Understanding Compustat’s Adjustments to Cost of Goods Sold and their Implications for Research

• In Event: Financial Accounting and Reporting IV

Abstract

As academic and practitioner research has become more sophisticated, the use of disaggregated financial statement information has increased. However, use of this information without understanding the way in which it is prepared can affect the interpretation and generalizability of the research results. Noting that Compustat’s cost of goods sold (COGS) amounts are systematically and non-trivially lower than the COGS amounts reported in financial statements, the authors examine the reasons for these differences and find that the differences are not adequately explained in Compustat’s documentation. Rather than one method, the authors find nine possible adjustment patterns to compute Compustat COGS; and the most common patterns eliminate entity-wide depreciation from COGS. This finding is particularly relevant to research on cost shifting through over-production since overhead is the primary cost shifted via this technique and manufacturing-related depreciation is a significant portion of overhead for businesses in which this cost-shifting technique could be applied.

Authors

• Sherwood Lane Lambert III, University of West Florida - Pensacola

• Eric D. Bostwick, University of West Florida - Pensacola

• Joseph G Donelan, University of West Florida - Ft Walton Bch