If ending inventory increases while beginning inventory and purchases remain constant, what is the likely effect on COGS?

If ending inventory increases while beginning inventory and purchases remain constant, what is the likely effect on COGS?

• A. COGS increases
• B. COGS decreases
• C. COGS remains unchanged
• D. COGS becomes negative

Answer: (B)

The main idea is that COGS is what you subtract from the goods available for sale to find what was sold. The formula is COGS = Beginning Inventory + Purchases − Ending Inventory. If beginning inventory and purchases stay the same, but ending inventory increases, you’re subtracting a larger number from the same total. That reduces the amount of cost recognized as COGS. For example, with beginning inventory of 100 and purchases of 200, goods available for sale are 300. If ending inventory is 150, COGS is 300 − 150 = 150. If ending inventory rises to 200, COGS becomes 300 − 200 = 100. So COGS decreases as ending inventory increases. Ending inventory increasing cannot cause COGS to rise; it would only stay the same if ending inventory didn’t change, and it would only be negative if ending inventory exceeded the total goods available for sale (beginnings plus purchases), which isn’t implied by the given scenario.

The main idea is that COGS is what you subtract from the goods available for sale to find what was sold. The formula is COGS = Beginning Inventory + Purchases − Ending Inventory. If beginning inventory and purchases stay the same, but ending inventory increases, you’re subtracting a larger number from the same total. That reduces the amount of cost recognized as COGS.

For example, with beginning inventory of 100 and purchases of 200, goods available for sale are 300. If ending inventory is 150, COGS is 300 − 150 = 150. If ending inventory rises to 200, COGS becomes 300 − 200 = 100. So COGS decreases as ending inventory increases.

Ending inventory increasing cannot cause COGS to rise; it would only stay the same if ending inventory didn’t change, and it would only be negative if ending inventory exceeded the total goods available for sale (beginnings plus purchases), which isn’t implied by the given scenario.