Why Cost of goods sold (CGS) can not be negative in Business


Every Business has some cost & cost incurred for generating revenue or Asset.  The main purpose of cost is to get benefits in the future. Companies incurred their cost to generate revenue or increase sales because to generate profit. In this sense, if a company wants to make a profit they have to incur costs at first. 

 

The cost of goods sold is one kind of cost which is related to that kind of product that has already been sold out. All kinds of manufacturing costs or direct costs adjusted with inventory (Opening+Closing) are included in the cost of goods sold. Nonmanufacturing cost or any kind of indirect cost is not included in the cost of goods sold. 

 

Since the cost of goods sold is related to sold out products that's why the cost of goods sold is closely related to sales. The sale is one kind of Revenue & Cost of goods sold is one kind of cost. The cost of goods sold incurred to generate sales revenue. So if a company wants to generate sales they have to incur the cost of goods sold without the cost of goods sold no company can generate sales revenue. By adjusting the Sales & Cost of goods sold we can find out gross margin or gross profit.


More suppressible cost of goods sold generates less gross margin & less suppressible cost of goods sold generates more gross margin. If the cost of goods sold shows negative, that indicates there is no cost incurred behind sales revenue & sales revenue generated without any cost but if we want to generate sales revenue we must have to incur a cost behind sales revenue bcoz sales revenue did not come magically. Keep in mind the cost of generating sales revenue is the cost of goods sold.


In a nutshell, without the cost of goods sold no company can generate sales revenue. If a company wants to generate sales revenue the company must have incurred the cost of goods sold. On the other hand, if a company wants to know their gross margin they must have the amount of cost of goods sold. If the cost of goods sold is negative then we can know only the amount of sales revenue by which we can't find out the gross margin of our Business. That's why the Cost of goods sold cannot be negative in Business.


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