Isn't there any cost of goods sold or cost of service for financial products?

CFA Level II
#1

For those who havethe 2016 CFA level 2 volume 2 book, solution #8 in page 18, mentions that financial products are excluded from the calculation of gross profit.

  1. I am just wondering- isn’t there any cost of goods sold or cost of service for financial products?

  2. If there is, is it also ignored when solving for gross profit in real life?

#2

COGS: nope.

Pure services don’t have COGS. Nor Inventory.

#3

Thanks for the clarifiication.

#4

You’re quite welcome.

#5

Magician, if financial services are neither accounted for in COGS or inventory, where on the financial statements are they accounted for? This isn’t in CFAI L2 curriculum from what little I’ve read so far.

#6

P&L - Administrative expenses

#7

Yup: SG&A.

#8

Shah: would this be on the income statment?

If financial services is the main business of the company, where on the financial statements would the financial services expense go to? Also admin expenses? I wouldn’t think so…

#9

Yes: P&L = income statement.

All exoenses go on the income statement. If you’re not selling _ goods , then you cannot have a CO G _S. The costs are all sales, general, and administrative: SG&A.

#10

The cost to provide their ordinary activity is included in adm expenses before the EBIT line in the P&L.

If the financial company has some interest bearing debt, it is classified as interest expense or payable like any other business

Insurance, brokerage, consultancy companies follow this structure… Banks are a little bit more complicated but this is the essence

#11

Magician, if I were a team member working on underwriting a certain IPO or M&A for an investment bank whose main business are those two things, my service fee will be billed in SG&A, regardless of whether I were a full time employee of the company or in a consultant capacity?

#12

Yes as a wage or a fee, it is a operating cost

#13

Yup.

#14

Importnt note: If the Investment Bank is doing the work for a bond issuance, the fees wold be capitlaized and amortized into Interest Expense over the life of the bonds. Bond/Loan underwriting work is a deferred fiancning cost. So it really depends on what service the Investment Bank is providing.

As for the earlier COGS discussion, for banks COGS is most similar to Interest Expense. Their revenue sections typically have two groupings: Net Interest Income (Interest Income less Interest Expense) and Non-Interest Income.

#15

Ohh, the cost on the Investment Bank’s books. I was thinking the client of the investment bank, sorry. Yeah, if you can see their Financial Statements you can probably figure it out. They probably have a line for “Personnel” or something like that. Contractors/temps may or may not be in there. They could be in some other line, but they both probably roll up intoi the same section (SG&A), if they classify their P&L that way. Income Statement presentation varies a lot.

#16

Are stocks and bonds “financial products”? If so, then there should be inventory and related cost of products sold for a dealer.

#17

There is no inventory nor COGS in financial products creation. As mentioned above inputs in entire service industry (also finance services industry) are wages (spent working hours on various projects), other services of 3rd party co-operaters, net costs of regulation (incl.auditing, tax advisory etc) and those operating costs are mapped to revenues from service providing within same period. Result is operating income, no COGS, no Inventory (work in progress).

#18

For commercial banks, primary financial products are loans.

In general, bank’s income statement is not structured in traditional way, so you might not see COGS etc. However, you can think “COGS” for a commercial bank in terms of how much expenses they are incurring to provide that finacial product. So for providing loans “COGS” will be the cost of deposit. So commercial banks take deposits, pay interest on those deposits, and then lend out that money as loans. So “COGS” could be thought of interest paid on those deposits.

#19

AlwaysaLearner

Better not because it is incorrect term just to avoid any doubts.

#20

Fixed that for you.

(I was just covering this in my Managerial Accounting class two days ago; many of the students make the same mistake.)