The Comprehensive Guide on How to Read a Financial Report: Wringing Vital Signs Out of the Numbers, + Website

CHAPTER 10

OPERATING EXPENSES AND ACCOUNTS PAYABLE

The Connection Is Important but Let’s Start with the Basics

All businesses incur operating expenses. Alternatively, these expenses are commonly referred to as Op. Ex., selling, general, and administrative expenses (SG&A), just general and administrative expenses (G&A), or a hybrid of these names. The name really isn’t what is as important as understanding what an operating expense is versus what a costs of goods sold expense is. On the surface, this may appear to be very straightforward but when investigated further, you see as many different interpretations of what should be an operating expense versus what should be accounted for as costs of goods sold expense, as there are political opinions expressed in Washington, DC on a weekly basis. A boatload!

The following mini–real world–based case study highlights two companies that treat the exact same expense in a different manner.

Mini–Real World Case Study

Company A and B operated with similar business models but accounted for one expense in a different manner—merchant credit card fees. Merchant credit card fees are fees incurred by any company that accepts credit cards (and debit cards or PayPal for that matter) as a form of payment. Although these fees may vary significantly, for smaller businesses the fees tend to average around 2.5 percent to 3 percent of the amount collected. Company A accounted for this expense as a direct cost of goods sold as a large percentage of customers ...