What is the difference between COGS and SG&A? Give two examples of costs that belong in each for a manufacturing company.

What the interviewer is actually testing

Income statement questions screen for whether you can move beyond reciting lines to reasoning with the statement. Four things they're listening for:

1. Ordering logic, not memorized order. A strong candidate can explain why interest sits below EBIT (it's a financing cost, not an operating one) and why that makes EBIT/EBITDA the metrics for enterprise-value multiples. If you say "EBIT is capital-structure-neutral" unprompted, you've signaled the entire valuation module in one sentence.

2. Fluency in the metrics that aren't printed. EBITDA doesn't appear on the statement; interviewers expect you to build it and to know the D&A-inside-COGS trap: you often need the cash flow statement to find total D&A. Being precise about where numbers come from separates candidates who've touched real filings from those who've only read guides.

3. Margins as instant analysis. Given two companies, you should reflexively compare gross margin (business model), EBITDA margin (operating efficiency), and their direction. Interviewers love "Company A has a higher gross margin but lower EBITDA margin: what does that tell you?" (Answer: heavier OpEx load, likely high S&M spend or subscale G&A, a potential operating leverage story.)

4. What's recurring vs one-time. Expect: "Revenue grew 10% but EPS doubled: what happened?" Strong candidates enumerate: margin expansion via operating leverage, a prior-year one-time charge rolling off, lower interest after a paydown, a lower tax rate, or buybacks shrinking the share count. Listing levers by line of the income statement, top to bottom is the signal of a structured mind, and that structure is exactly what this lesson gives you.

Keep definitions tight: one sentence per line item, then stop. The differentiation happens on follow-ups, and the best preparation is knowing each line's why: who the claimant is and how the line behaves as revenue moves.

Common traps

Trap 1: Confusing bookings, revenue, and cash collected. Candidates say revenue is "money the company received." Revenue is what was delivered/earned in the period. Orders not yet delivered are backlog/bookings; cash received before delivery is deferred revenue; delivered but unpaid is accounts receivable.

Say it out loud: "Revenue is recognized when the product or service is delivered, not when the order is signed or the cash arrives. Cash before delivery creates deferred revenue; delivery before cash creates receivables."

Trap 2: Treating EBITDA as if it were on the income statement, or as cash flow. EBITDA is a constructed metric, and it is not cash flow: it excludes CapEx, working capital, cash interest, and cash taxes. Buffett's line, "does management think the tooth fairy pays for CapEx?", exists for a reason.

Say it out loud: "EBITDA is EBIT plus D&A: I build it, it's not a GAAP line, and it's only a rough proxy for operating cash generation because it ignores CapEx, working capital, interest, and taxes."

Trap 3: Forgetting D&A can hide inside COGS and SG&A. Candidates compute EBITDA by scanning the income statement for a D&A line, find none or find a partial one, and get the wrong number. Manufacturers put production depreciation in COGS.

Say it out loud: "D&A is often embedded in COGS and SG&A rather than broken out, so I'd pull total D&A from the cash flow statement when building EBITDA."

Trap 4: Using basic shares (or yesterday's price) thinking for EPS. For valuation and merger math you want diluted EPS: options, RSUs, and converts are real claims. Also, EPS uses weighted-average shares over the period, not period-end shares.

Say it out loud: "I'd use diluted EPS (net income over weighted-average diluted shares, capturing in-the-money options via the treasury stock method) because those claims are economically real."

Trap 5: Applying the statutory tax rate everywhere. The effective rate differs from 21%-plus-state because of foreign income, credits, and discrete items; and the provision isn't cash taxes.

Say it out loud: "I'd use the company's effective tax rate, or a normalized long-run rate, rather than the statutory rate, and I'd remember book tax expense differs from cash taxes through deferred taxes."

Trap 6: Calling every charge 'one-time.' Restructuring that appears every year is a recurring cost of doing business. Serial "one-time" add-backs inflate adjusted EBITDA: a quality-of-earnings red flag.

Say it out loud: "I'd only normalize genuinely non-recurring items. If a company takes 'restructuring' charges every year, that's an operating cost, and I'd push back on adding it back."

Trap 7: Ignoring stock-based comp because it's non-cash. SBC is a real economic expense paid in equity. It dilutes shareholders. Adding it back to get "adjusted" earnings without counting the dilution double-counts the benefit.

Say it out loud: "Stock-based comp is non-cash but not free: it's compensation paid in shares, so if I add it back to earnings I have to capture the cost through a higher diluted share count."