Cost of merchandise sold equals beginning inventory
A. plus net purchases minus ending inventory.
B. plus net purchases plus ending inventory.
C. minus net purchases plus ending inventory.
D. minus net purchases minus ending inventory.
The Correct Answer and Explanation is:
Correct Answer: A. plus net purchases minus ending inventory
Explanation (300+ words):
The Cost of Merchandise Sold (COMS), also known as Cost of Goods Sold (COGS), is a key accounting metric used under Generally Accepted Accounting Principles (GAAP) to determine the direct costs associated with producing goods that were sold during a specific accounting period. It includes the cost of materials and direct labor used to create the goods.
The standard formula for calculating the Cost of Merchandise Sold is:
$$
\text{Cost of Merchandise Sold} = \text{Beginning Inventory} + \text{Net Purchases} – \text{Ending Inventory}
$$
Why Option A is Correct:
- Beginning Inventory: This is the value of inventory the company had on hand at the beginning of the accounting period.
- Net Purchases: This includes all purchases of inventory during the period, plus freight-in, minus purchase returns and allowances.
- Ending Inventory: This is the inventory still available at the end of the accounting period, which was not sold.
By adding net purchases to beginning inventory, we calculate the total goods available for sale. Subtracting the ending inventory gives us the cost of the goods that were actually sold.
$$
\text{Goods Available for Sale} = \text{Beginning Inventory} + \text{Net Purchases}
$$
$$
\text{Cost of Merchandise Sold} = \text{Goods Available for Sale} – \text{Ending Inventory}
$$
Sample Calculation:
Let’s say:
- Beginning Inventory = \$5,000
- Purchases during the year = \$12,000
- Purchase Returns and Allowances = \$1,000
- Ending Inventory = \$4,000
Step 1: Calculate Net Purchases
$$
\text{Net Purchases} = 12,000 – 1,000 = 11,000
$$
Step 2: Add Beginning Inventory
$$
\text{Goods Available for Sale} = 5,000 + 11,000 = 16,000
$$
Step 3: Subtract Ending Inventory
$$
\text{Cost of Merchandise Sold} = 16,000 – 4,000 = 12,000
$$
So, the Cost of Merchandise Sold is \$12,000.
Conclusion:
Option A correctly reflects the formula used under GAAP for calculating the cost of merchandise sold:
Beginning Inventory + Net Purchases – Ending Inventory
This ensures proper matching of expenses with revenue in the period they were incurred, supporting the matching principle in accounting.