What does a significant increase in cost of goods sold compared to sales growth suggest?

A significant increase in the cost of goods sold (COGS) compared to sales growth suggests that inventory may have been depleted, potentially due to theft. When COGS rises sharply while sales do not correspondingly increase, it can indicate that more inventory is being consumed than what is being sold. This discrepancy may arise from various factors, but theft is a prominent concern in instances where goods are available for sale but unaccounted for in sales data.

This scenario could also encompass inefficiencies or errors in inventory management; however, the clear implication of theft is significant. It highlights the importance of scrutinizing inventory controls and safeguarding measures to ensure that losses from theft do not adversely affect the financial statements.

The other options do not directly relate to the implication of COGS rising faster than sales. If sales had decreased, we would expect COGS to decrease as well or at least not to rise significantly. A drop in purchasing quantities might lead to lower COGS over time, depending on the inventory remaining. Additionally, a rise in sales returns typically does not match a significant increase in COGS; instead, it would more likely suggest a decline in net sales rather than an increase in costs.