Unadjusted cost of goods sold is calculated by subtracting.
The Correct Answer and Explanation is :
The unadjusted cost of goods sold (COGS) is calculated by subtracting the ending inventory from the cost of goods available for sale. The formula looks like this:
[
\text{Unadjusted COGS} = \text{Cost of Goods Available for Sale} – \text{Ending Inventory}
]
Explanation:
1. Cost of Goods Available for Sale
This represents the total cost of inventory that was available for sale during the period. It includes the beginning inventory (the value of inventory at the start of the period) plus any purchases made during the period to replenish the inventory. So, the cost of goods available for sale is the sum of these components:
[
\text{Cost of Goods Available for Sale} = \text{Beginning Inventory} + \text{Purchases}
]
2. Ending Inventory
Ending inventory refers to the value of the inventory that remains unsold at the end of the period. It is determined through physical counts or using inventory systems (like perpetual or periodic). The value of the ending inventory is subtracted from the cost of goods available for sale to determine the unadjusted cost of goods sold.
3. Unadjusted COGS Calculation
Once the cost of goods available for sale and the ending inventory are known, the unadjusted COGS is computed by subtracting the ending inventory from the total cost of goods available for sale. This calculation gives an estimate of the cost of the goods that have been sold during the period.
[
\text{Unadjusted COGS} = (\text{Beginning Inventory} + \text{Purchases}) – \text{Ending Inventory}
]
4. Adjustments to COGS
The unadjusted COGS may later be adjusted for additional factors like inventory shrinkage (theft or loss), or changes in inventory accounting methods (e.g., FIFO vs. LIFO). These adjustments refine the cost of goods sold to reflect a more accurate figure for financial reporting.
This process is essential for determining a company’s profitability and understanding how much it costs to produce or acquire the goods that were sold during a specific period.