ACCOUNTING HORIZONS American Accounting Association

Vol. 30, No. 2 DOI: 10.2308/acch-51336

June 2016
pp. 177–193

A Wrench in the COGS: An Analysis of the Differences

between Cost of Goods Sold as Reported in Compustat and
in the Financial Statements
Eric D. Bostwick
Sherwood Lane Lambert
Joseph G. Donelan
University of West Florida
SYNOPSIS: This paper explores the differences between cost of goods sold (COGS) and gross margin (GM) as
reported in Compustat and in corporate financial statements between 2008 and 2011. We find that, on average,
Compustat’s COGS is 7.5 percent lower and Compustat’s GM is 14.3 percent higher than the amounts reported in
the financial statements. We identify one specific Compustat adjustment procedure that accounts for most of this
difference, the adjustment for depreciation, thereby providing an important contribution to extant literature dealing
with differences between Compustat and 10-K data. Finally, we provide a correction that will allow future researchers
to use data within Compustat to adjust Compustat’s COGS and GM variables to more closely approximate the 10-K
amounts.
Keywords: cost of goods sold; gross margin; gross profitability; Compustat; 10-K; earnings management;
earnings prediction; financial statement reporting.

INTRODUCTION

S
tandard & Poor’s (S&P) Compustat database is used extensively for both academic and practitioner research.
Compustat applies proprietary standardization methods to the 10-K data that can create significant differences between
the underlying 10-K data and the database variables, particularly with regard to the cost of goods sold (COGS) variable.
Prior research has investigated both the differences among alternative data aggregation services and the differences between
various data aggregation services and the 10-K, but no other study has provided a complete analysis of the Compustat COGS
variable, nor has any other study provided a useful solution to allow users to approximate 10-K COGS using Compustat data.
The present study fills both of these voids in the literature.
Using a sample of 10,758 firm-years from 2008–2011, across all SIC industry codes, we find that Compustat’s COGS
variable is 7.5 percent lower, on average, than the amounts reported on 10-Ks. Because Compustat uses its COGS variable to
compute its gross margin (GM) amounts, the Compustat GM value is 14.3 percent higher, on average, than the 10-K GM.
Further, we find that most of the difference between 10-K COGS and Compustat COGS results from one particular Compustat
adjustment whereby entity-wide depreciation, depletion, and amortization (DD&A) is deducted from 10-K COGS to derive
Compustat COGS. Compustat uses this adjustment process whenever a firm does not disclose the specific amount of DD&A in
various cost categories (e.g., COGS and selling, general, and administrative [SG&A] expense). Since U.S. GAAP (generally
accepted accounting principles) does not require firms to disclose their allocation of DD&A among cost objects, very few
companies provide this allocation information. As a result, we find that the Compustat COGS value is fundamentally different
from 10-K COGS for approximately 79 percent of the firm-years in our study.

We thank the senior data lead, data analysts, and data policy board members at Standard & Poor’s who provided reviews, recommendations, and
corrections to earlier analyses related to the present manuscript. We also thank reviewers and participants at the 2014 American Accounting Association
Annual and Southeast Regional Meetings for their helpful suggestions. We are also thankful to Ray Ball, Maureen McNichols, Dale Flesher, and Victoria
Dickinson for their perspectives and encouragement on earlier drafts of the paper. Finally, we appreciate the comments and insights of Paul A. Griffin
(editor) and two anonymous reviewers.
An earlier version of this paper was cited by Ball, Gerakos, Linnainmaa, and Nikolaev (2015).
Editor’s note: Accepted by Paul A. Griffin.
Submitted: February 2015
Accepted: October 2015
Published Online: November 2015
177
178 Bostwick, Lambert, and Donelan

The differences we observed between Compustat COGS and 10-K COGS motivated us to identify the underlying reason for
this difference and to determine whether we could provide a method for approximating the 10-K COGS using Compustat data.
We examined three Compustat adjustment methods and found that the best method for approximating 10-K COGS was to add
Compustat’s depreciation, depletion, and amortization variable, DP, to the Compustat COGS variable whenever the Compustat
COGSF footnote variable (described in ‘‘The Nature of 10-K and Compustat COGS’’ section) was coded ‘‘BD.’’ Using this
method, the average difference between the adjusted Compustat COGS and 10-K COGS was reduced from 7.5 percent to 1.5
percent, and the related difference between adjusted Compustat GM and 10-K GM was reduced from 14.3 percent to 1.6 percent.

BACKGROUND AND MOTIVATION

Numerous studies have investigated the differences both among data aggregation services and between various data
aggregation services and the underlying 10-K data. For example, Kern and Morris (1994) examine the differences between
Compustat and Expanded Value Line databases, but they examine only high-level variables, e.g., total assets, total sales, and
effective tax rates. Kinney and Swanson (1993) study the accuracy of 19 Compustat tax fields, noting potential problems with
Compustat’s coding policies. Yang, Vasarhelyi, and Liu (2003) examine data discrepancies between Value Line and Compustat
for seven financial statement variables, not including cost of goods sold. They state that one of the reasons for the differences is
the different variable definitions used by the two data aggregation services. Tallapally, Luehlfing, and Motha (2011) examine
the difference between EDGAR Online and Compustat values for cost of goods sold and find that 29 out of 30 firms’ COGS
values did not match. They conclude that the differences are caused by proprietary Compustat data standardization techniques.
Boritz and No (2013) manually compare financial items reported in 150 XBRL 10-K filings of 75 companies to the
corresponding items provided by three data aggregators: Compustat, Yahoo Finance, and Google Finance. The study identifies
and reports data on three COGS measures: Cost of Revenue, Cost of Goods Sold, and Cost of Goods and Services Sold. For all
three of those line items, there were 14, 12, and 11 companies (respectively) that had material differences between the XBRL
10-K filings and the aggregator’s database. However, individual line items were not the focus of this study, so it provides little
additional insight regarding COGS.
Chychyla and Kogan (2015) examine 30 accounting line items for approximately 5,000 firms. They compare XBRL data
to Compustat and find significant differences (p , 0.05) for 20 of the 30 line items. The difference they report for COGS (8.56
percent at p , 0.01) is reasonably consistent with the results we report in the present study. Chychyla and Kogan (2015)
surmise that Compustat’s relatively complex definition for COGS is the likely reason for the relatively large difference.
However, the authors do not investigate the nature and frequency of any Compustat adjustments to COGS.
These prior studies have demonstrated that there are potential measurement problems associated with the use of Compustat
data, but they have not provided a description of the nature of the differences for COGS, nor have they provided any solution to
approximate the 10-K COGS data. Such a solution would be useful, given the significance of the COGS concept in research. For
example, Novy-Marx (2012) uses gross margin (sales minus COGS) as a variable in earning prediction. In addition, numerous
earnings management studies, following Dechow, Kothari, and Watts (1998) and Roychowdhury (2006), have measured the
effects of overproduction using PROD as a proxy for production costs, where PROD ¼ COGS þ change in inventory (Cohen,
Dey, and Lys 2008; Cohen and Zarowin 2010; Dechow, Ge, Larson, and Sloan 2011; Gupta, Pevzner, and Seethamraju 2010;
Gunny 2010; Zang 2012). Of the studies mentioned, Gupta et al. (2010) are the only ones that appear to acknowledge that there is
a difference between Compustat COGS and 10-K COGS. Gupta et al. (2010) use the PROD formula, and they adjust Compustat
COGS by adding back DD&A (Compustat DP), but they do not explain why they employ this procedure. Due to the widespread
use of Compustat COGS in research and the relatively large difference between Compustat COGS and 10-K COGS, it is possible
that the systematic difference between Compustat COGS and the 10-K COGS could impair the generalizability of the results of
earlier studies. Accordingly, we are motivated to investigate the differences between Compustat COGS and the 10-K COGS and
to investigate approaches for more closely approximating 10-K COGS data using Compustat data.
The remainder of the paper proceeds as follows. The third section describes the nature of COGS as disclosed in the 10-K
and as reported by Compustat. The fourth section quantifies the differences between COGS and GM as reported on the 10-K
and as reported in Compustat, and provides a method for approximating 10-K COGS using Compustat variables. The fifth
section presents recommendations for future research. The sixth section summarizes the study. Table 1 provides a summary of
acronyms and terminology used in this study.

THE NATURE OF 10-K AND COMPUSTAT COGS

10-K Cost of Goods Sold

The Accounting Standards Codification (ASC) contains neither a formal definition of cost of goods sold (COGS), nor a
requirement that companies separately present COGS on their financial statements. However, if a company chooses to disclose

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A Wrench in the COGS: Differences between COGS as Reported in Compustat and Financial Statements 179

TABLE 1
Summary of Acronyms and Terminology
Acronyms and Author-Defined Terms Used in this Article
AM Amortization of Intangibles, as computed by Compustat (Compustat AM).
DD&A Depreciation, depletion, and amortization, commonly understood as non-cash expenses that systematically and
rationally allocate fixed costs over multiple periods.
DP Depreciation, depletion, and amortization, as reported by Compustat (Compustat DP).
COGS ‘‘Cost of Goods Sold,’’ commonly understood as the cost of inventory sold during the period.
C_COGS The amount of COGS as computed by Compustat (Compustat COGS).
10-K COGS The amount of COGS as reported in a firm’s 10-K; used primarily in the pilot study portion of the current study.
K_COGS The amount of COGS (or similar descriptive titles) reported by Intrinsic Research; used as a proxy for 10-K COGS
in the expanded analysis portion of the current study.
GM ‘‘Gross Margin,’’ commonly understood as Sales less COGS.
C_GM Gross margin as computed using Compustat variables (SALE  COGS).
K_GM Gross margin as computed by subtracting K_COGS (Intrinsic Research proxy for 10-K COGS) from the
Compustat variable SALE.
SALE Net sales as recorded by Compustat, commonly understood as the value received (or promised) in exchange
for goods or services provided (Compustat SALE).

COGS as a separate line item, then the ASC provides accounting and disclosure guidance under ASC Section 705, Cost of
Sales and Services (Financial Accounting Standards Board [FASB] 2015d), and ASC 330, Inventory (FASB 2015b). Although
the primary basis of accounting for inventory is cost (ASC 330-10-30-01) with full absorption of fixed overhead (ASC 330-10-
30-8), GAAP permits companies many variations when reporting COGS. For example, a company may include outbound
shipping and handling costs in COGS (FASB 2015c, Revenue Recognition, ASC 605-45-50-2), or a company may choose to
exclude not only shipping and handling costs, but also depreciation and amortization costs (FASB 2015a, Income Statement,
ASC 225-10-S99-8). In addition, a company may choose to include other expenses in COGS that are not normally associated
with inventory (e.g., Gap, Inc. includes occupancy costs in COGS). Thus, the flexibility allowed in reporting COGS not only
makes the inter-company and inter-industry comparison of COGS challenging, but it also makes it more difficult for data
aggregation services to report a standardized COGS measure.

Compustat Cost of Goods Sold

The Compustat income statement format presents a separate line item for both cost of goods sold (Compustat COGS;
hereafter, C_COGS)1 and depreciation, depletion, and amortization (Compustat DP). To accomplish this, S&P modifies data
from 10-K filings so that the DP variable can be created and presented without altering bottom-line net income. When a
company reports the allocation of DD&A among specific line items (e.g., COGS and SG&A expenses), S&P will remove the
specified amounts of DD&A from each of the items indicated and will collect all DD&A in the DP variable. However, when
companies do not disclose the allocation of DD&A among line items, S&P will still collect all DD&A in the DP variable, but
they will also subtract total DD&A from other line items within the financial statements. Most often, the entire amount of
DD&A is deducted from COGS. The use of this procedure removes entity-wide DD&A from 10-K COGS to produce a C_
COGS value that is often materially different from 10-K COGS. This difference also fundamentally alters the relationships
between C_COGS and other financial statement variables. Because Compustat computes gross margin (GM) as SALE minus
COGS, to the extent that C_COGS differs from 10-K COGS, Compustat GM (hereafter, C_GM) will also differ from 10-K
GM. We explain the DD&A adjustment more fully below.
If a company separately reports firm-wide DD&A on its income statement, then S&P makes no DD&A-related adjustment
to the 10-K COGS. This was true for approximately 1 percent of the 270 firm-years in our pilot study. (The pilot study is more
fully discussed in the ‘‘Analysis of Compustat and 10-K Cost of Goods Sold Data’’ section.) However, if the 10-K does not
contain a DD&A line item, then there are three possible DD&A-related adjustments that S&P might make to COGS. First, if a
company discloses the dollar amounts of DD&A that are associated with COGS and SG&A, then S&P will remove from

1
Compustat COGS and COGSF data definitions are included in Appendix A.

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180 Bostwick, Lambert, and Donelan

COGS and SG&A only that portion of DD&A associated with each of those expense line items. Compustat used this procedure
in approximately 4 percent of the 270 firm-years in our pilot study. Second, if a company does not disclose the amount of
DD&A associated with COGS and SG&A, then S&P will subtract entity-wide DD&A (Compustat DP) from COGS. We refer
to this adjustment procedure as the DP method. Compustat used this procedure in approximately 74 percent of the 270 firm-
years in our pilot study. Finally, if a company does not disclose the amounts of depreciation and depletion associated with
COGS and SG&A, but it does disclose the amount of amortization associated with COGS and SG&A, then S&P will subtract
from COGS and SG&A the portion of amortization that is disclosed as being associated with each of these expense
classifications and will also subtract entity-wide depreciation and depletion from COGS. Thus, entity-wide depreciation and
depletion (Compustat DP less Compustat AM) is subtracted from COGS. We refer to this third adjustment method as the DP-
AM method. Compustat used this procedure in approximately 21 percent of the 270 firm-years in our pilot study. In addition to
these modifications, Compustat might also make other small adjustments to COGS for various items listed in their data
definition. Although S&P made these types of adjustments in 18 percent of the 270 firm-years in our pilot study, these
adjustments seldom resulted in more than a 0.5 percent change from the original 10-K values.
The result of applying the DP and DP-AM adjustments is that COGS is reduced not only by the amount of DD&A
associated with COGS, but also by the additional amount of DD&A associated with other cost objects (e.g., SG&A expense).
Of the 270 firm-years in our pilot study, approximately 96 percent provided no disclosures related to the allocation of DD&A
among cost objects, and in each of these cases, either the DP or DP-AM adjustment was used to create the Compustat COGS
(C_COGS) variable. When S&P applies either the DP or DP-AM procedure, they place the alpha code ‘‘BD’’ in the Compustat
data item COGSF, which indicated ‘‘all DD&A deducted from COGS. (Portion of depreciation included in reported SG&A is
not disclosed.)’’2 (S&P 2015); however, the BD notation does not indicate which of the two procedures had been used.

ANALYSIS OF COMPUSTAT AND 10-K COST OF GOODS SOLD DATA

Pilot Study
We performed a pilot study to investigate the differences between the C_COGS and 10-K COGS. Using the S&P Capital
IQ Compustat Fundamentals North American database, we selected 90 manufacturing firms from each year from 2009 to 2011,
without replacement, for a total of 270 unique firm-years. Because of our understanding of the Compustat depreciation
adjustments to COGS, we limited our pilot study to manufacturing firms (SIC 3) to assure that the 270 companies would have a
meaningful amount of depreciation expense included in COGS. For each of these 270 firm-years, we manually compared C_
COGS to 10-K COGS using the Securities and Exchange Commission (SEC) EDGAR database. Our objectives in the pilot
study were to explore the data, to determine the magnitude of the differences between C_COGS and 10-K COGS, and to
determine the unique components that reconcile the differences. Results are described below.
We determined that C_COGS could be reconciled to 10-K COGS for 209 of the firms (77.4 percent of the 270 firms; see
Table 2, Panel A) by adding back to C_COGS either entity-wide depreciation or entity-wide depreciation and entity-wide
amortization. We reconciled C_COGS to 10-K COGS for an additional 49 firms (18.2 percent of the 270 firms; see Table 2,
Panel B) by adding back to C_COGS other documented Compustat adjustments unrelated to depreciation or amortization
(‘‘other’’ adjustments), along with either entity-wide depreciation or entity-wide depreciation and entity-wide amortization. For
these 49 firms, the ‘‘other’’ adjusting items comprised a very small portion of the difference between C_COGS and 10-K
COGS. The remaining 12 firms (4.4 percent of the 270 firms; see Table 2, Panel C) were reconciled by various other methods.
Examining the 10-Ks for all 270 firms, we found that C_COGS could be reconciled to 10-K COGS for 258 of these firms
primarily by adding back depreciation or depreciation and amortization to C_COGS. Further, none of those 258 firms disclosed
the portion of depreciation or amortization that was in their COGS. This corroborates our understanding of the procedure used
by S&P when such disclosures are missing. None of the 270 firms had depletion expense, so adjustments for depletion expense
were not needed to reconcile C_COGS to 10-K COGS.
Table 3, Panel A shows that C_COGS understates 10-K COGS by an average of 9.8 percent (SD 7.1 percent), and this
difference represents 5.6 percent of sales. Because depreciation and amortization were the most frequent reconciling items, we
performed additional analysis to quantify the proportion of differences between C_COGS and 10-K COGS that were
attributable to depreciation alone, to amortization alone, and to all adjustments other than depreciation and amortization.

2
Previously, the COGSF note stated that COGS was ‘‘reduced by an amount of depreciation which should be allocated to SGA.’’ Compustat changed to
the current wording in 2015 as a result of our discussions with their staff and their review of earlier analyses related to the present manuscript. This data
definition is used with permission of Standard & Poor’s Financial Services LLC, a wholly owned subsidiary of The McGraw-Hill Companies.
Copyright@2015. All rights reserved.

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A Wrench in the COGS: Differences between COGS as Reported in Compustat and Financial Statements 181

TABLE 2
Compustat COGS Reconciled to 10-K COGS

Panel A: Firm-Years Reconciled by Adding Back Only Depreciationa or Depreciationa and Amortizationb
Number of Percent of
Reconciliation Procedures Firms Firms
1. 10-K COGS ¼ C_COGS þ Depreciationa þ Amortizationb 170
2. 10-K COGS ¼ C_COGS þ Depreciationa 39
Subtotal 209 77.4%

Panel B: Firm-Years Reconciled by Adding Back Depreciationa or Depreciationa and Amortizationb along with
‘‘Other’’ Specifically Identified S&P Adjustment Items
Number of Percent of
Reconciliation Procedures Firms Firms
3. 10-K COGS ¼ C_COGS þ Depreciationa þ Amortizationb 6 other 30
4. 10-K COGS ¼ C_COGS þ Depreciationa 6 other 19
Subtotal 49 18.2%

Total number of firm-years reconciled primarily by adding back Depreciationa or Depreciationa and Amortizationb 258 95.6%

Panel C: Firm-Years Reconciled by Other Methodsc

Number of Percent of
Reconciliation Procedures Firms Firms
5. 10-K COGS ¼ C_COGS þ Depreciationa þ portion of amortization in 10-K COGS 1
6. 10-K COGS ¼ C_COGS þ Depreciationa þ portion of amortization in 10-K COGS 6 other 1
7. 10-K COGS ¼ C_COGS þ Amortizationb þ portion of depreciation in 10-K COGS 5
8. 10-K COGS ¼ C_COGS þ portion of depreciation in 10-K COGS 2
9. 10-K COGS ¼ C_COGS þ portion of depreciation in 10-K COGS 6 other 1
10. 10-K COGS ¼ C_COGS 6 other 1
11. 10-K COGS ¼ C_COGS 1
Subtotal 12 4.4%

Total firm-years reconciled 270 100%

a
Entity-wide depreciation.
b
Entity-wide amortization.
c
For each of these firm-years, it was possible to determine (based on firm disclosures) the portion of depreciation, amortization, or both that was allocated
to 10-K COGS.

Table 3, Panel B demonstrates that the deduction of depreciation alone from 10-K COGS causes a 8.5 percent difference
between C_COGS and 10-K COGS. The deduction of amortization alone causes only a 2.1 percent difference between C_
COGS and 10-K COGS (see Table 3, Panel C). Finally, including all of S&P’s other adjustments (other than depreciation and
amortization) causes only a 0.7 percent difference between C_COGS and 10-K COGS (see Table 3, Panel D). These results
indicate that depreciation and amortization account for most of the difference between C_COGS and 10-K COGS.
Table 3 also provides an analysis of the gross margin data. Panel A shows that C_GM overstates 10-K GM by an average
of 21.3 percent. Panels B and C demonstrate that depreciation and amortization comprise the major components of the
difference between C_GM and 10-K GM, causing differences of 20.3 and 2.5 percent, respectively. All adjustments other than
depreciation and amortization, considered in total, cause only a 0.8 percent difference between C_GM and 10-K GM.
Thus, Table 3 demonstrates that non-depreciation and non-amortization adjustments, even when considered together, make
up only a small portion of the overall difference between C_COGS and 10-K COGS and between C_GM and 10-K GM.
Accordingly, we focus the remainder of our analysis on S&P’s depreciation and amortization adjustments to COGS. To

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182 Bostwick, Lambert, and Donelan

TABLE 3
Comparison of Cost of Goods Sold and Gross Margin Amounts between Compustat and 10-Ks for the Pilot Study of
270 Firm-Years (2009–2011)

Panel A: Average Differences between Compustat Variables and 10-K Amountsa,b

Percent by Which Percent by Which Difference
C_COGS Understates C_GM Overstates as a Percent
Statistic 10-K COGS 10-K GM of Net Sales
Mean 9.8% 21.3% 5.6%
SD 7.1% 46.6% 4.3%

Panel B: Average Differences when C_COGS is Computed by Adjusting 10-K COGS Only for Depreciationa,c
Percent by Which Percent by Which Difference
C_COGS Understates C_GM Overstates as a Percent
Statistic 10-K COGS 10-K GM of Net Sales
Mean 8.5% 20.3% 5.0%
SD 6.5% 47.7% 4.2%

Panel C: Average Differences when C_COGS is Computed by Adjusting 10-K COGS Only for Amortizationa,d
Percent by Which Percent by which Difference
C_COGS Understates C_GM Overstates as a Percent
Statistic 10-K COGS 10-K GM of Net Sales
Mean 2.1% 2.5% 1.0%
SD 4.1% 16.6% 1.5%

Panel D: Average Differences when C_COGS is Computed by Adjusting 10-K COGS Only for Items other than
Depreciation and Amortizationa,e
Percent by which Percent by which Difference
C_COGS Understates C_GM Overstates as a Percent
Statistic 10-K COGS 10-K GM of Net Sales
Mean 0.7% 0.8% 0.3%
SD 5.0% 5.0% 2.1%
a
C_GM is computed as Compustat SALE minus C_COGS, where C_COGS is computed as specified below for each condition.
b
C_COGS is taken directly from Compustat.
c
C_COGS is computed as if only depreciation adjustments are applied to 10-K COGS; adjustments for non-DD&A items and amortization are not
applied.
d
C_COGS is computed as if only amortization adjustments are applied to 10-K COGS; adjustments for non-DD&A items and depreciation are not
applied.
e
C_COGS is computed as if all adjustments other than adjustments for depreciation and amortization are applied to 10-K COGS.

accomplish this, we examine how well C_COGS could be reconciled to 10-K COGS by applying one of the following three
adjustments to C_COGS:
1. Add back Compustat DP (DD&A) to C_COGS for all firms, regardless of the state of the COGSF variable. This is the
method used by Gupta et al. (2010), and we refer to this as the Gupta method.
2. Add back Compustat DP less Compustat AM (i.e., adding back depreciation) to C_COGS only for firms for which the
COGSF variable is set to BD. We refer to this as the DP-AM method.
3. Add back Compustat DP to C_COGS only for firms for which the COGSF variable is set to BD. We refer to this as the
DP method.
Table 4 shows the results of applying the three reconciliation methods to the 270 firms in our pilot study. The original
difference between C_COGS and 10-K COGS of 9.8 percent (SD 7.1 percent) was reduced to 1.0 percent (SD 4.1 percent)
after applying the Gupta method, to 1.4 percent (SD 2.7 percent) after applying the DP-AM method, and to 0.7 percent (SD

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TABLE 4
Averages (Standard Deviations) of Differences between C_COGS and10-K COGS and between C_GM and 10-K GM
by Adjustment Procedure for the 270 Firms in the Pilot Study
Comparison of Comparison of
C_COGS to 10-K COGS C_GM to 10-K GM
Average Average
Adjustment Method Difference Std. Dev Difference Std. Dev.
a
Unadjusted Amounts 9.8% 7.1% 21.3% 46.6%
Gupta Methodb 1.0% 4.1% 2.4% 11.8%
DP-AM Methodc 1.4% 2.7% 2.4% 5.7%
DP Methodd 0.7% 4.1% 0.8% 11.2%
a
Difference is computed for each firm as follows: (C_COGS  10-K COGS) 4 10-K COGS.
b
Per the procedure used by Gupta et al. (2010), we computed an adjusted C_COGS by adding back DP to C_COGS for all firms regardless of the status of
COGSF. The difference using the adjusted C_COGS is computed as in note ‘‘a.’’
c
We computed an adjusted C_COGS by adding (DP-AM) to C_COGS only for those firms for which COGSF equals BD. Otherwise, the original C_
COGS amount was retained. The difference using the adjusted C_COGS is computed as in note ‘‘a.’’
d
We computed an adjusted C_COGS by adding back DP to C_COGS only for those firms for which COGSF equals BD. Otherwise, the original C_COGS
amount was retained. The difference using the adjusted C_COGS is computed as in note ‘‘a.’’

4.1 percent) after applying the DP method. The small difference between the Gupta method and the DP method is not surprising
given that 261 of the 270 firms had a BD flag in the COGSF variable. Thus, although all three methods reduce the difference
between the adjusted C_COGS and 10-K COGS, the DP method results in the smallest average difference.
Table 4 shows that the difference between C_GM and 10-K GM was also reduced by applying all three methods. After
removing four firms for which the 10-K showed a gross loss, while Compustat showed a gross profit (leaving 266 firms for
analysis), the original difference between C_GM and 10-K GM of 21.3 percent (SD 46.6 percent) was reduced to 2.4 percent
(SD 11.8 percent) after applying the Gupta method, to 2.4 percent (SD 5.7 percent) after applying the DP-AM method, and to
0.8 percent (SD 11.2 percent) after applying the DP method. Thus, the DP method is also superior to the other methods in
reducing the difference between C_GM and 10-K GM.

Expanded Analysis across All SIC Codes

Motivation for Expanding the Sample
Because the pilot study of 270 firms was limited to SIC 3, we are motivated to expand the sample. The purpose of the
expanded sample is to allow our conclusions and our three reconciliation methods to be generalizable to a wide range of
research agendas. Accordingly, we expand our sample to include all firm-years from 2008 through 2011 across all SIC codes.
To facilitate data collection in this expanded analysis, we use the COGS variable as provided by Intrinsic Research as a
surrogate for the 10-K COGS (hereafter, K_COGS) because Intrinsic Research reports a parsimonious, unadjusted version of
cost of goods sold. In other words, if a company reports ‘‘cost of goods,’’ ‘‘cost of purchases,’’ or anything similar, then Intrinsic
Research uses that line item as the COGS figure. In some cases, Intrinsic Research will include other line items from the 10-K
income statement, but only when the 10-K indicates that those line items are considered to be a component of cost of goods
sold (e.g., restructuring costs shown on a separate line, but labeled in the 10-K as a component of cost of goods sold). When
there is no traditional COGS figure in the 10-K, Intrinsic Research uses the single largest expense line item, which is usually the
cost of material or cost of purchases, exclusive of labor and overhead.3
For the 2008 to 2011 period, Compustat included 24,935 firm-years, and our Intrinsic Research query provided 11,538
matching firm-years. From this matched set of firm-years, we eliminated 278 firm-years because the Compustat value for C_COGS
was negative (2), zero (106), or blank (170). Although none of the remaining values for K_COGS were blank, 501 additional firm-
years were eliminated because the K_COGS was either negative (4) or zero (497). One additional firm-year was eliminated because
the Compustat value for AM was negative. Thus, 780 firm-years were eliminated, leaving 10,758 firm-years for analysis.

3
To test the reliability of the Intrinsic Research data as a surrogate for 10-K data, we compared the Intrinsic Research COGS variable to 10-K COGS for
the 270 firms in our pilot study. Of these 270 firms, 214 were included in the Intrinsic Research database, and the Intrinsic Research COGS variable
exactly matched 10-K COGS for all 214 firms. Therefore, within SIC 3, the Intrinsic Research COGS variable appears to be a highly accurate proxy for
the 10-K COGS data.

Accounting Horizons
Volume 30, Number 2, 2016
184 Bostwick, Lambert, and Donelan

Analysis of COGS
We identify all firm-years for which C_COGS can be reconciled to K_COGS with at least 99 percent accuracy using each
of the three methods indicated above. We used the 99 percent accuracy threshold because in our pilot study, we found that less
than 1 percent (0.7 percent from Table 3, Panel D) of the difference between C_COGS and 10-K COGS was the result of non-
DD&A Compustat adjustments. Therefore, we consider the difference between C_COGS and K_COGS to be reasonably
reconciled if the difference is less than 1 percent.
Table 5 shows the results of applying the reconciliation procedures described in the previous section of this paper. The
Gupta method reconciles C_COGS to K_COGS with 99 percent or greater accuracy for a total of 4,890 (45.5 percent) firm-
years. This is an improvement of 2,597 firm-years over the unadjusted values. The DP-AM method reconciles C_COGS to K_
COGS with 99 percent or greater accuracy for a total of 5,729 (53.3 percent) firm-years. This is an improvement of 3,436 firm-
years over the unadjusted values. Finally, the DP method reconciles C_COGS to K_COGS with 99 percent or greater accuracy
for a total of 6,473 (60.2 percent) firm-years. This is an improvement of 4,180 firm-years over the unadjusted values. Thus, the
DP method produces the highest number of firm-years and the largest improvement in firms-years for which C_COGS and K_
COGS are within 1 percent of each other.
While Table 5 provided an analysis of the accuracy of the adjustments on a firm-by-firm basis, Table 6 provides an analysis
of the improvement in the average differences between C_COGS and K_COGS across the entire sample. Before adjustment,
the average difference between C_COGS and K_COGS (as a percent of K_COGS) is 7.5 percent (SD 24.7 percent). The
negative value indicates that C_COGS is less than K_COGS. Applying the Gupta method results in an average difference of 8.3
percent (SD 60.9 percent). The average difference is noteworthy since it is not only larger than the difference between the
original variables in absolute value, but it is also of the opposite sign, indicating that the general relationship between C_COGS
and K_COGS has been reversed. Moreover, the variability of the Gupta method is more than twice the variability of the other
reconciliation methods. This is not surprising, given that the Gupta method adds back DP to C_COGS regardless of the status
of the COGSF flag. Applying the DP-AM method produces an average difference of 3.4 percent (SD 25.2 percent) between
C_COGS and K_COGS, and using the DP method produces an average difference of 1.5 percent (SD 29.8 percent) between
C_COGS and K_COGS. Thus, adding back DP to C_COGS when COGSF equals BD (the DP method) brings C_COGS and
K_COGS into the closest degree of agreement as measured by both the number of firm-years reconciled (see Table 5) and the
average percentage difference between the dollar values of the variables (see Table 6).4
Since the earnings management literature (e.g., Roychowdhury [2006] and related studies) focuses primarily on
manufacturing firms, we highlight firm-years from SIC 2 and SIC 3 in Table 7. (Some information from Tables 5 and 6 is also
reproduced for ease of reference.) Of the 4,812 firm-years from SIC 2 and SIC 3, 4,100 have the BD flag in COGSF. Therefore,
the Gupta method may be more successful in adjusting C_COGS to K_COGS within this subset of firm-years. To establish a
baseline for comparison, the unadjusted difference between C_COGS and K_COGS is less than 1 percent for 448 firm-years,
and C_COGS is less than K_COGS by an average of 8.6 percent (SD 14.6 percent) across these industry groups. The Gupta
method brings C_COGS and K_COGS to within 1 percent of each other for 3,148 firm-years, an improvement of 2,700 firm-
years over the unadjusted values, and the average difference between C_COGS and K_COGS is þ2.1 percent (SD 41.4
percent). Using the DP-AM method results in 2,865 firm-years for which the difference between C_COGS and K_COGS is 1
percent or less, an improvement of 2,417 firm-years over the unadjusted values, and the average difference between C_COGS
and K_COGS is 2.8 percent (SD 17.4 percent). Applying the DP method reconciles C_COGS and K_COGS to within 1
percent of each other for 3,412 firm-years, an improvement of 2,964 firm-years over the unadjusted values, and the average
difference between C_COGS and K_COGS is 0.2 percent (SD 29.3 percent). While the Gupta method provides a marked
improvement over the unadjusted values, it still changes the direction of the relationship between C_COGS and K_COGS and
increases the variability in the data. Thus, the results indicate that within SIC 2 and SIC 3, the DP method continues to be the
best method for approximating 10-K COGS using only Compustat data items.

Analysis of GM
When C_COGS and 10-K COGS are both close to zero, or when DP is large, S&P’s subtraction of DP from 10-K COGS
could result in the 10-K reporting a gross loss, while Compustat reports a gross profit. To examine this possibility, we compare
C_GM to GM computed by deducting K_COGS from Compustat SALE (hereafter, K_GM). We find 651 firm-years for which

4
We also computed the average of the absolute values of the differences between C_COGS and K_COGS as a measure of the magnitude of the
differences from zero. The pattern of improvement is similar to the results reported above. Using unadjusted C_COGS, the average of the absolute
values of the differences is 14.5 percent; using the Gupta method, the difference is 18.7 percent; and using the DP-AM method, the difference is 11.1
percent. Applying the DP method still produces the smallest difference of 4.7 percent.

Accounting Horizons
Volume 30, Number 2, 2016
 TABLE 5
Count of Firm-Years for Which Adjusted C_COGS and K_COGS are Within 1 Percent of Each Other across All SIC Codes, by Industry and by
Adjustment Procedure
(2008 to 2011)
Firm-

Accounting Horizons
Total Years Firm-Years in Agreement Firm-Years in Agreement Firm-Years in Agreement Firm-Years in Agreement
SIC Firm- with before Adjustmenta using Gupta Methodb using DP-AM Methodc using DP Methodd
Group Years BD Flag (% of SIC Group Total) (% of SIC Group Total) (% of SIC Group Total) (% of SIC Group Total)

Volume 30, Number 2, 2016

0xxx 54 35 7 27 30 30
(13.0%) (50.0%) (55.6%) (55.6%)
1xxx 810 199 251 206 365 372
(31.0%) (25.4%) (45.1%) (45.9%)
2xxx 1,564 1,170 194 911 915 1,056
(12.4%) (58.2%) (58.5%) (67.5%)
3xxx 3,248 2,930 254 2,237 1,950 2,356
(7.8%) (68.9%) (60.0%) (72.5%)
4xxx 1,133 129 340 154 393 429
(30.0%) (13.6%) (34.7%) (37.9%)
5xxx 1,147 593 474 591 832 849
(41.3%) (51.5%) (72.5%) (74.0%)
6xxx 925 94 211 96 253 257
(22.8%) (10.4%) (27.4%) (27.8%)
7xxx 1,439 784 427 508 727 858
(29.7%) (35.3%) (50.5%) (59.6%)
8xxx 418 202 134 148 257 254
(32.1%) (35.4%) (61.5%) (60.8%)
9xxx 20 20 1 12 7 12
(5.0%) (60.0%) (35.0%) (60.0%)
Totals 10,758 6,156 2,293 4,890 5,729 6,473
(21.3%) (45.5%) (53.3%) (60.2%)
Improvement in the number of firm-years NA þ2,597 firm-years þ3,436 firm-years þ4,180 firm-years
reconciled within 1% by each method
A Wrench in the COGS: Differences between COGS as Reported in Compustat and Financial Statements

a
Difference is computed by firm-year as follows: (C_COGS  K_COGS) 4 K_COGS.
b
Per the procedure used by Gupta et al. (2010), we computed an adjusted C_COGS by adding back DP to C_COGS for all firm-years regardless of the status of COGSF. The difference using the
adjusted C_COGS is computed as in note ‘‘a.’’
c
We computed an adjusted C_COGS by adding (DP-AM) to C_COGS only for those firm-years for which COGSF equals BD. Otherwise, the original C_COGS amount was retained. The difference
using the adjusted C_COGS is computed as in note ‘‘a.’’
d
We computed an adjusted C_COGS by adding back DP to C_COGS only for those firm-years for which COGSF equals BD. Otherwise, the original C_COGS amount was retained. The difference
using the adjusted C_COGS is computed as in note ‘‘a.’’
185
186 Bostwick, Lambert, and Donelan

TABLE 6
Averages (Standard Deviations) of Differences between C_COGS and K_COGS for all Firm-Years, by Industry and by
Adjustment Procedure
(2008–2011)
Firm-
Total Years Adjusted Adjusted Adjusted
SIC Firm- with Unadjusted C_COGS C_COGS C_COGS
Group Years BD Flag Differencesa using Gupta Methodb using DP-AM Methodc using DP Methodd
0xxx 54 35 4.7% 4.9% 0.2% 0.4%
(14.5%) (19.9%) (13.8%) (13.8%)
1xxx 810 199 3.6% 43.1% 1.9% 1.8%)
(26.7%) (103.2%) (26.9%) (26.9%
2xxx 1,564 1,170 9.9% 0.6% 4.8% 2.0%
(19.9%) (28.5%) (19.1%) (21.6%)
3xxx 3,248 2,930 7.9% 2.8% 1.9% 0.6%
(11.2%) (46.4%) (16.5%) (32.3%)
4xxx 1,133 129 2.2% 25.4% 3.4% 3.7%
(32.8%) (45.8%) (32.2%) (32.1%)
5xxx 1,147 593 4.0% 0.0% 2.3% 2.2%
(21.2%) (22.8%) (21.3%) (21.3%)
6xxx 925 94 16.4% 0.7% 15.5% 14.8%
(48.7%) (133.0%) (48.8%) (48.8%)
7xxx 1,439 784 11.4% 9.8% 5.5% 0.9%
(19.7%) (35.5%) (18.3%) (18.6%)
8xxx 418 202 5.5% 3.0% 2.3% 1.7%
(22.9%) (25.0%) (22.8%) (22.8%)
9xxx 20 20 4.7% 4.3% 2.5% 4.3%
(13.4%) (14.9%) (15.1%) (14.9%)
Totals 10,758 6,156 7.5% 8.3% 3.4% 1.5%
(24.7%) (60.9%) (25.2%) (29.8%)
a
Difference is computed by firm-year as follows: (C_COGS  K_COGS) 4 K_COGS.
b
Per the procedure used by Gupta et al. (2010), we computed an adjusted C_COGS by adding back DP to C_COGS for all firm-years regardless of the
status of COGSF. The difference using the adjusted C_COGS is computed as in note ‘‘a.’’
c
We computed an adjusted C_COGS by adding (DP-AM) to C_COGS only for those firm-years for which COGSF equals BD. Otherwise, the original C_
COGS amount was retained. The difference using the adjusted C_COGS is computed as in note ‘‘a.’’
d
We computed an adjusted C_COGS by adding back DP to C_COGS only for those firm-years for which COGSF equals BD. Otherwise, the original C_
COGS amount was retained. The difference using the adjusted C_COGS is computed as in note ‘‘a.’’

C_GM reports a gross profit, while K_GM indicates a gross loss. There are also 23 firm-years for which K_GM indicates a
gross profit, while C_GM reports a gross loss. C_GM and K_GM both indicate a gross loss for an additional 269 firm-years.
Since average differences are difficult to interpret when values are negative, and especially so when a variable changes signs,
we removed the 943 firm-years described above from the 10,758 firm-years previously used to analyze COGS, resulting in
9,815 firm-years for use in the GM portion of our analysis.
Table 8 summarizes the number of firm-years for which C_GM and K_GM are within 1 percent of each other both before
and after applying the COGS adjustments discussed previously. Before adjustment, C_GM is within 1 percent of K_GM for
1,958 (19.9 percent) of the 9,815 firm-years, and 627 of these firm-years match exactly. Computing GM using the Gupta
method to adjust C_COGS results in 4,234 (43.1 percent) firm-years for which C_GM and K_GM are within 1 percent of each
other; this is an improvement of 2,276 firm-years over the unadjusted values. Computing GM when C_COGS is adjusted using
the DP-AM method results in 4,907 (50.0 percent) firm-years for which C_GM and K_GM are within 1 percent of each other.
This is an improvement of 2,949 firm-years over the unadjusted values. Finally, when GM is computed using C_COGS after
applying the DP method, C_GM and K_GM are reconciled within 1 percent of each other for 5,906 (60.2 percent) firm-years.
This is an improvement of 3,948 firm-years over the unadjusted values.
While Table 8 provided an analysis of the accuracy of the adjustment methods on a firm-by-firm basis, Table 9 provides an
analysis of the improvement in the average differences between C_GM and K_GM across the entire sample. Before adjustment,
C_GM is 14.3 percent larger than K_GM across all industries (SD 170.5 percent). The positive value indicates that C_GM is

Accounting Horizons
Volume 30, Number 2, 2016
 TABLE 7
Averages (Standard Deviations) of Differences between C_COGS and K_COGS for all Firm-Years, across SIC 2 and SIC 3 Only, by Adjustment
Procedure (2008–2011)
Difference between Difference between Difference between Difference between
Firm- C_COGS and K_COGS C_COGS and K_COGS C_COGS and K_COGS C_COGS and K_COGS

Accounting Horizons
Total Years when C_COGS when C_COGS when C_COGS when C_COGS
SIC Firm- with is not is Adjusted is Adjusted is Adjusted
Group Years BD Flag Adjusteda using Gupta Methodb using DP-AM Methodc using DP Methodd

Volume 30, Number 2, 2016

2xxx 1,564 1,170 9.9% 0.6% 4.8% 2.0%
(19.9%) (28.5%) (19.1%) (21.6%)
Firm-years within 1% 194 911 915 1,056
3xxx 3,248 2,930 7.9% 2.8% 1.9% 0.6%
(11.2%) (46.4%) (16.5%) (32.3%)
Firm-years within 1% 254 2,237 1,950 2,356
2 and 3 4,812 4,100 8.6% 2.1% 2.8% 0.2%
(14.6%) (41.4%) (17.4%) (29.3%)
Firm-years within 1% 448 3,148 2,865 3,412
Improvement in the number of firm-years NA þ2,700 firm-years þ2,417 firm-years þ2,964 firm-years
reconciled within 1% by each method
a
Difference is computed by firm-year as follows: (C_COGS  K_COGS) 4 K_COGS.
b
Per the procedure used by Gupta et al. (2010), we computed an adjusted C_COGS by adding back DP to C_COGS for all firm-years regardless of the status of COGSF. The difference using the
adjusted C_COGS is computed as in note ‘‘a.’’
c
We computed an adjusted C_COGS by adding (DP-AM) to C_COGS only for those firm-years for which COGSF equals BD. Otherwise, the original C_COGS amount was retained. The difference
using the adjusted C_COGS is computed as in note ‘‘a.’’
d
We computed an adjusted C_COGS by adding back DP to C_COGS only for those firm-years for which COGSF equals BD. Otherwise, the original C_COGS amount was retained. The difference
using the adjusted C_COGS is computed as in note ‘‘a.’’
A Wrench in the COGS: Differences between COGS as Reported in Compustat and Financial Statements
187
 188

TABLE 8
Count of Firm-Years for which C_GM and K_GM Agree with 99 Percent or Greater Accuracy for All SIC Codes, by Industry and by Adjustment
Procedure (2008 to 2011)
Firm-Years for Which Firm-Years for Which Firm-Years for Which Firm-Years for Which
Firm- C_GM and K_GM Adjusted C_GM and Adjusted C_GM and K_GM Adjusted C_GM and K_GM
Total Years are in Agreement K_GM are in Agreement are in Agreement are in Agreement
SIC Firm- with before Adjustmenta using Gupta Adjustmentb using DP-AM Adjustmentc using DP Adjustmentd
Group Years BD Flag (% of SIC Group Total) (% of SIC Group Total) (% of SIC Group Total) (% of SIC Group Total)
0xxx 51 34 7 21 22 27
(13.7%) (41.2%) (43.1%) (52.9%)
1xxx 704 178 204 157 281 326
(29.0%) (22.3%) (39.9%) (46.3%)
2xxx 1,438 1,132 183 813 768 943
(12.7%) (56.5%) (53.4%) (65.6%)
3xxx 3,148 2,857 173 1,950 1,543 2,061
(5.5%) (61.9%) (49.0%) (65.5%)
4xxx 1,043 124 316 118 370 410
(30.3%) (11.3%) (35.5%) (39.3%)
5xxx 1,071 578 350 472 722 787
(32.7%) (44.1%) (67.4%) (73.5%)
6xxx 577 91 199 79 237 245
(34.5%) (13.7%) (41.1%) (42.5%)
7xxx 1,384 771 404 484 734 857
(29.2%) (35.0%) (53.0%) (61.9%)
8xxx 379 186 122 132 226 242
(32.2%) (34.8%) (59.6%) (63.9%)
9xxx 20 20 0 8 4 8
(0.0%) (40.0%) (20.0%) (40.0%)
Totals 9,815 5,971 1,958 4,234 4,907 5,906
(19.9%) (43.1%) (50.0%) (60.2%)
Improvement in the number of firm-years NA þ2,276 firm-years þ2,949 firm-years þ3,948 firm-years
reconciled within 1% by each method
a
Difference is computed by firm-year as follows: (C_GM  K_GM) 4 K_GM.
b
Per the procedure used by Gupta et al. (2010), we computed an adjusted C_GM by adding back DP to C_COGS for all firm-years regardless of the status of COGSF. This adjusted C_COGS was
deducted from SALE to compute adjusted C_GM. The difference using the adjusted C_GM is computed as in note ‘‘a.’’
c
We computed an adjusted C_GM by adding (DP-AM) to C_COGS only for those firm-years for which COGSF equaled BD. Otherwise, the original C_COGS amount was retained. This adjusted C_
COGS was deducted from SALE to compute adjusted C_GM. The difference using the adjusted C_GM is computed as in note ‘‘a.’’
d
We computed an adjusted C_GM by adding back DP to C_COGS only for those firm-years for which COGSF equals BD. Otherwise, the original C_COGS amount was retained. This adjusted C_
COGS was deducted from SALE to compute adjusted C_GM. The difference using the adjusted C_GM is computed as in note ‘‘a.’’

Accounting Horizons
Bostwick, Lambert, and Donelan

Volume 30, Number 2, 2016

A Wrench in the COGS: Differences between COGS as Reported in Compustat and Financial Statements 189

TABLE 9
Averages (Standard Deviations) of Differences between C_GM and K_GM for all Firm-Years, by Industry and by
Adjustment Procedure
(2008–2011)
Difference between Difference between Difference between
Difference between C_GM and K_GM C_GM and K_GM C_GM and K_GM
Firm- C_GM and K_GM whenC_COGS when C_COGS when C_COGS
Total Years when C_COGS isAdjusted is Adjusted is Adjusted
SIC Firm- with is not Adjusteda usingGupta et al. (2010)b using C_COGS þ DP-AMc using C_COGS þ DPd
Group Years BD Flag (% of SIC Group Total) (% of SIC Group Total) (% of SIC Group Total) (% of SIC Group Total)
0xxx 51 34 113.3% 49.9% 80.6% 79.3%
(449.7%) (307.0%) (434.9%) (434.9%)
1xxx 704 178 20.5% 30.1% 10.5% 10.2%
(80.6%) (60.3%) (64.7%) (64.7%)
2xxx 1,438 1,132 18.1% 1.3% 7.0% 4.2%
(57.5%) (48.0%) (52.1%) (47.3%)
3xxx 3,148 2,857 23.0% 0.5% 4.5% 1.7%
(271.9%) (56.4%) (58.4%) (58.3%)
4xxx 1,043 124 2.2% 32.4% 4.0% 4.7%
(157.4%) (43.4%) (60.2%) (58.5%)
5xxx 1,071 578 3.7% 6.1% 0.8% 1.1%
(25.1%) (24.2%) (23.4%) (23.3%)
6xxx 577 91 3.0% 12.8% 5.7% 6.3%
(73.3%) (53.1%) (61.3%) (61.1%)
7xxx 1,384 771 9.8% 7.5% 4.2% 1.3%
(36.2%) (26.7%) (28.1%) (27.4%)
8xxx 379 186 8.0% 5.3% 3.4% 2.3%
(41.4%) (38.9%) (41.1%) (41.1%)
9xxx 20 20 12.6% 5.9% 3.0% 5.9%
(20.8%) (22.3%) (22.3%) (22.3%)
Totals 9,815 5,971 14.3% 8.4% 3.5% 1.6%
(170.5%) (53.2%) (60.4%) (59.5%)
a
Difference is computed by firm-year as follows: (C_GM  K_GM) 4 K_GM.
b
Per the procedure used by Gupta et al. (2010), we computed an adjusted C_GM by adding back DP to C_COGS for all firm-years regardless of the status
of COGSF. This adjusted C_COGS was deducted from SALE to compute adjusted C_GM. The difference using the adjusted C_GM is computed as in
note ‘‘a.’’
c
We computed an adjusted C_GM by adding (DP-AM) to C_COGS only for those firm-years for which COGSF equaled BD. Otherwise, the original C_
COGS amount was retained. This adjusted C_COGS was deducted from SALE to compute adjusted C_GM. The difference using the adjusted C_GM is
computed as in note ‘‘a.’’
d
We computed an adjusted C_GM by adding back DP to C_COGS only for those firm-years for which COGSF equals BD. Otherwise, the original C_
COGS amount was retained. This adjusted C_COGS was deducted from SALE to compute adjusted C_GM. The difference using the adjusted C_GM is
computed as in note ‘‘a.’’

larger than K_GM, which is to be expected since unadjusted C_COGS was less than K_COGS. Using the C_COGS value
produced by the Gupta method, the difference between C_GM and K_GM is 8.4 percent (SD 53.2 percent). Since the Gupta
method reverses the direction of the relationship between C_COGS and K_COGS, the direction of the relationship between C_
GM and K_GM is also reversed. Using the C_COGS values derived from using the DP-AM method, the average difference
between C_GM and K_GM is 3.5 percent (SD 60.4 percent). Finally, applying the DP method results in an average difference
of 1.6 percent (SD 59.5 percent) between C_COGS and K_COGS. These results are presented overall and by industry in Table
9.

RECOMMENDATIONS FOR FUTURE RESEARCH

Since some financial statement users (e.g., Compustat; Gupta et al. 2010) already adjust COGS for DD&A, the disclosure
of the allocation of DD&A among cost objects appears to have value to some financial statement users. Therefore, we

Accounting Horizons
Volume 30, Number 2, 2016
190 Bostwick, Lambert, and Donelan

recommend that future studies examine the cost effectiveness of requiring firms to disclose the amounts of depreciation and
amortization allocated to various financial statement elements.
For researchers, analysts, and others who use Compustat COGS, we recommend four possible approaches to overcome the
differences between C_COGS and 10-K COGS. The first approach is to continue to use Compustat data, while acknowledging
that Compustat uses standardization methods to modify the financial statement elements (e.g., Kang and Sivaramakrishnan
1995; McVay 2006). While such an acknowledgement alerts readers to the fact that C_COGS may (or may not) be different
from 10-K COGS, it is possible that neither the researchers nor the readers realize the extent to which these variables may be
significantly different from the financial statement elements they are intended to represent. A shortcoming of this approach is
that the resulting studies evaluate a ‘‘research reality’’ based on the pseudo-relationships among the data items as redefined by
data aggregation services, rather than examining the ‘‘real reality’’ of the relationships among financial statement elements as
presented in the financial statements. The use of such ‘‘research reality’’ variables could reduce, or even eliminate, the value and
generalizability of even a well-crafted study or theory that might otherwise accurately reflect business results. Perhaps this
difference explains some of the oft-lamented disconnect between academic research in accounting and its applicability to
practice. However, this approach would be appropriate in circumstances for which the Compustat-adjusted COGS data are the
most accurate measure of the underlying phenomenon that the researcher intends to capture. But if the researcher believes that
the underlying economic phenomenon is most accurately measured by the primary 10-K COGS data, then one of the following
approaches may be more appropriate.
The second approach is to use primary data that are hand-collected from the 10-K or to use XBRL-tagged data, which is a
machine-readable version of the 10-K prepared by the filer. For example, Innocent, Mary, and Matthew (2013) use primary
data in their research out of necessity, since data aggregation services typically do not cover publicly traded companies in
emerging markets. Walther (1982, 377) also appears to take this approach, given that he indicates the elimination of certain
companies due to the lack of certain disclosures in their financial statements. Ford (2011) explicitly states that his data come
directly from 10-Ks. However, the reality of academia requires increasingly sophisticated studies that often rely upon large
datasets. This compels researchers to abandon the time-consuming and potentially error-prone hand collection of primary data
and to rely upon machine-readable sources such as XBRL or data aggregation services.
A third approach would be to use data sources that may match the data contained in the 10-K more closely than Compustat
does (e.g., Intrinsic Research, Factiva, Value Line). But alternative data sources have their own limitations and different data
definitions and procedures, especially for complex variables such as COGS. Additionally, the data service of choice for most
research institutions is Compustat, and the consistent and widespread use of a particular data aggregation service does facilitate
the replication and extension of prior studies.
A fourth approach is to derive mechanical procedures to ‘‘fix’’ C_COGS so that it more closely approximates 10-K COGS.
If possible, such a result would seem to be the best of both worlds: it would allow the use of data aggregation services with their
thousands of machine-readable data points, and it would also restore some of the integrity to the relationships between the
aggregated values and the actual financial statement amounts. Although Dyckman and Zeff (2014, 695) note that replication
studies have ‘‘been essentially abandoned,’’ they encourage both the use of standardized electronic datasets and the replication
of prior studies. An automated process for reconciling C_COGS to 10-K COGS would facilitate both of these activities. Since
the deduction of DP from 10-K COGS accounts for most of the difference between C_COGS and 10-K COGS, selectively
adding back DP to C_COGS when the COGSF variable is set to BD results in an adjusted C_COGS that more closely
approximates 10-K COGS. Furthermore, to the extent that the adjusted C_COGS more accurately reflects 10-K COGS, the
adjusted C_GM (computed as SALE  C_COGS) will also more accurately reflect 10-K GM. Although the amounts necessary
to perfectly adjust C_COGS to 10-K COGS are not always provided within Compustat,5 the C_COGS adjustment procedure
described in this study reduces both the absolute number of differences and the overall average numerical difference between
C_COGS and C_GM and the related 10-K data.

SUMMARY
Using a sample of 10,758 firm-years across all industries from 2008–2011, we find that Compustat COGS (C_COGS)
understates 10-K COGS (K_COGS) by an average of 7.5 percent.6 Since Compustat gross margin (C_GM) is computed using

5
For example, when only a portion of depreciation is deducted from 10-K COGS or when non-DD&A adjustments are made to convert 10-K COGS to
C_COGS, these adjustment amounts are not tracked as Compustat data items. Therefore, the procedures described in this paper do not completely
correct the underlying issue. However, this limitation is likely to be more relevant to financial analysts examining particular firms than to researchers
examining average differences across a large number of firm-years.
6
In our hand-collected pilot study of 270 individual firms (described in the ‘‘Analysis of Compustat and 10-K Cost of Goods Sold Data’’ section), we
found that for all 270 firms, the Intrinsic Research COGS equaled the hand-collected 10-K COGS. Therefore, we use Intrinsic Research COGS in place
of hand-collected 10-K COGS in the expanded sample. We use the acronyms K_COGS and K_GM to denote the Intrinsic Research data.

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A Wrench in the COGS: Differences between COGS as Reported in Compustat and Financial Statements 191

the C_COGS variable, the difference between C_COGS and K_COGS also causes C_GM to overstate 10-K GM (K_GM) by
14.3 percent. Further examination of these discrepancies revealed that whenever a firm does not disclose the amount of
depreciation, depletion, and amortization (DD&A) allocated to COGS, Standard and Poor’s (S&P) will most often subtract
either entity-wide DD&A (Compustat DP) or entity-wide DD&A less amortization (Compustat DP  Compustat AM) from 10-
K COGS to compute the Compustat COGS variable. We refer to the first Compustat adjustment procedure as the DP method
and the latter adjustment procedure as the DP-AM method. When either of these procedures is used, the non-numeric
Compustat COGSF data item is set to ‘‘BD.’’ While S&P documents numerous other adjustments that are made to 10-K COGS,
we find that the two depreciation-related adjustments indicated above account for virtually all of the difference between C_
COGS and K_COGS.
In addition to identifying the primary reasons for these differences, we also examined three methods for adjusting C_
COGS to more closely approximate K_COGS, thereby also improving the correspondence between C_GM and K_GM. We
first used the method employed by Gupta et al. (2010): adding back entity-wide depreciation and amortization (Compustat DP)
to all firm-years regardless of the status of the COGSF variable. This method reconciled C_COGS to COGS for 45.5 percent of
the individual firm-years in the sample and changed the average difference between C_COGS and COGS from 7.5 percent to
8.3 percent. (Note the change in sign.) Next, we examined the DP-AM method, which added back to C_COGS the value of
Compustat DP less Compustat AM only when the COGSF variable was set to BD. The DP-AM method reconciled C_COGS to
K_COGS for 53.3 percent of the individual firm-years in the sample and reduced the average difference between C_COGS and
K_COGS from 7.5 percent to 3.4 percent. Finally, we found that the best method for adjusting C_COGS was the DP
method, which added back Compustat DP to C_COGS whenever the COGSF variable was set to BD. The DP method
reconciled C_COGS to K_COGS for 60.2 percent of the individual firm-years in the sample and reduced the average difference
between C_COGS and K_COGS from 7.5 percent to 1.5 percent.
The results for gross margin (GM) were similar. Before adjustment, C_GM was 14.3 percent higher than K_GM. Applying
the Gupta method reconciled 43.1 percent of the firm-years in the sample and resulted in an adjusted C_GM that was 8.4
percent lower than K_GM. (Again, note the change in sign.) The DP-AM method reconciled 50.0 percent of the individual
firm-years in the sample and produced an adjusted C_GM value that was 3.5 percent higher than K_GM. Once again, the DP
method provided the best results, reconciling 60.2 percent of the individual firm-years in the sample and producing an adjusted
C_GM value that was only 1.6 percent higher than K_GM.
Based on our findings, we make the following two recommendations. First, we recommend that future research examine the cost
effectiveness of requiring firms to disclose the amounts of depreciation and amortization allocated to various financial statement
elements. Such a disclosure would allow S&P and other users (e.g., analysts, investors, researchers) to accurately separate
depreciation and amortization expenses from COGS, when desired. Second, we recommend that researchers adopt one of four
possible approaches to address the differences between C_COGS and 10-K COGS. The first approach is to continue to use
Compustat COGS data and to acknowledge that S&P makes adjustments to the financial statement COGS variable. This approach
would be appropriate in circumstances for which the Compustat-adjusted COGS data are the most accurate measure of the
underlying phenomenon that the researcher intends to capture. However, if the researcher believes that the underlying economic
phenomenon is most accurately measured by the primary 10-K COGS data, then one of the following three approaches may be more
appropriate. The second approach is to use COGS data that are hand-collected from the 10-K or derived from the XBRL version of
the 10-K. The third approach is to use data sources that match the 10-K COGS more closely than Compustat does (e.g., Intrinsic
Research, Factiva, Value Line). The fourth approach is to use mechanical procedures, such as the DP method described in this study,
to reverse certain Compustat adjustments to the COGS variable so that it more closely approximates the primary 10-K COGS data.

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APPENDIX A
Compustat COGS Data Definition

Cost of Goods Sold

Mnemonic COGS
Annual Data Item A41
Units Millions of dollars

This item represents all costs directly allocated by the company to production, such as material, labor, and overhead. This
item is available for North American banks in the industrial format. The total operating costs for non-manufacturing companies
are considered as cost of goods sold if a breakdown is not available. This item includes the following expenses when broken out
separately. However, if a company allocates any of these items to selling, general, and administrative expenses, then Standard
& Poor’s will not include them in Cost of Goods Sold.
1. Agricultural, aircraft, automotive, radio, and television manufacturers’ amortization of tools and dies.
2. Airlines’ mutual aid agreements.

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3. Amortization of deferred costs (for example, start-up costs).

4. Amortization of tools and dies where the useful life is two years or less.
5. Amortization of film and television costs.
6. Cooperatives’ patronage dividends.
7. Direct costs—when a separate selling, general, and administrative expenses figure is reported.
8. Direct labor.
9. Expenses associated with sales-related income from software development.
10. Extractive industries’ lease and mineral rights charged off and development costs written off.
11. Freight-in.
12. Heat, light, and power.
13. Improvements to leased properties.
14. Insurance and safety.
15. Land developers’ investment real estate expense.
16. Licenses.
17. Maintenance and repairs.
18. Operating expenses.
19. Pension, retirement, profit sharing, provision for bonus and stock options, and other employee benefits (for
manufacturing companies). For non-manufacturing companies, this expense goes into Selling, General, and
Administrative Expenses.
20. Real estate investment trusts’ advisory fees.
21. Rent and royalty.
22. Lease expense.
23. Salary expense.
24. Supplies.
25. Taxes, other than income taxes.
26. Terminals and traffic.
27. Transportation.
28. Warehouse expense.
29. Write-downs of oil and gas properties.
This item excludes:
1. Amortization of intangibles (included in Depreciation).
2. Amortization of negative intangibles (included in Nonoperating Income/Expense).
3. Depreciation allocated to cost of goods sold (included in Depreciation).
4. Excise taxes.
5. Foreign exchange adjustments above this line (included in Nonoperating Income/Expense).
6. Idle plant expense (included in Nonoperating Income/Expense).
7. Miscellaneous expense (included in Nonoperating Income/ Expense).
8. Motion picture industries’ amortization of film expense.
9. Moving expense (included in Nonoperating Income/Expense).
10. Operating expenses when no selling, general, and administrative expenses figure is reported but a cost of goods sold
figure is reported.
11. Purchase discounts (netted against Cost of Goods Sold).

Cost of Goods Sold—Note

Mnemonic COGSF
Code Description
AC Reflects an accounting change
BD All DD&A deducted from COGS. (Portion of Depreciation included in reported SG&A is not
disclosed.)
FI Combination of AC and BD

Used with permission of Standard & Poor’s Financial Services LLC, a wholly owned subsidiary of The McGraw-Hill
Companies. Copyright 2015. All rights reserved.

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