How do you calculate the cost of goods sold (COGS)?

How do you calculate the cost of goods sold (COGS)?

• A. Add the beginning inventory to the ending inventory
• B. Subtract the ending inventory from the beginning inventory
• C. Subtract the total cost of the beginning inventory and purchases made during the accounting period from the total cost of the ending inventory
• D. Subtract the cost of goods sold from the purchases

Answer: (C)

The main idea is that COGS is the cost of inventory that was actually sold during the period. To get it, you combine what you had at the start (beginning inventory) with what you purchased during the period (purchases) to determine the total cost of goods available for sale. Then you subtract the ending inventory (what you still have on hand) to leave the cost of the goods that were sold. In formula form: COGS = Beginning Inventory + Purchases − Ending Inventory. The chosen option fits this approach because it describes taking the costs tied to the beginning inventory and purchases and removing the portion represented by ending inventory to arrive at COGS. The other options misstate the components or the direction of the subtraction, which would not isolate the amount actually sold.

The main idea is that COGS is the cost of inventory that was actually sold during the period. To get it, you combine what you had at the start (beginning inventory) with what you purchased during the period (purchases) to determine the total cost of goods available for sale. Then you subtract the ending inventory (what you still have on hand) to leave the cost of the goods that were sold. In formula form: COGS = Beginning Inventory + Purchases − Ending Inventory.

The chosen option fits this approach because it describes taking the costs tied to the beginning inventory and purchases and removing the portion represented by ending inventory to arrive at COGS. The other options misstate the components or the direction of the subtraction, which would not isolate the amount actually sold.