What adjustment should be made to Cost of Goods Sold for a distressed company in financial modeling?

In the context of financial modeling for a distressed company, adjusting the Cost of Goods Sold (COGS) for higher vendor costs due to supplier distrust is particularly relevant. When a company is facing financial distress, it may experience disruptions in its supply chain. This can lead to increased costs as suppliers may be less willing to extend favorable terms or may raise prices as a risk mitigation strategy. Increased vendor costs can significantly impact COGS and, consequently, gross margins.

The adjustment for higher costs helps reflect the current financial reality of the company, capturing the impacts of vendor relationships and market conditions that could affect operational expenses. In distress scenarios, how a company manages its vendor relationships and the associated costs can be crucial for understanding cash flow and profitability.

The other options do not accurately account for the immediate financial pressures and complexities that a distressed company faces. Decreasing COGS in light of lower sales does not recognize the potential for increased costs from supply chain issues, while leaving it unchanged oversimplifies the dynamics at play during financial distress. Increasing COGS to account for rising commodity prices could be relevant but does not specifically address the relationship dynamics with vendors, which can play a more significant role in such scenarios. Therefore, adjusting for higher vendor costs provides a more