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can you please explain me the risk related to the growth in revenue of 28% but only 10% growth in cost of sales? the model answer says “although the bonus scheme and the advertising campaign may explain the growth in revenue, the fact that the cost of sales has seen a corresponding increase needs to be investigated” and it does not explain WHY it’s a risk and HOW its linked to the financial statements
If a business in a manufacturing business “doubles”, for example, it’s not only revenue that doubles – you’d expect costs to double also (not exactly of course, but something of a similar order, maybe a bit less than double if there were economies of sale).
So what the answer is saying is if revenue increases by a quarter why have cost of sales not increase by a quarter also? Implication is either revenue is overstated and/or cost of sales in understated.
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