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
The Cost of Merchandise Sold (COMS), also known as Cost of Goods Sold (COGS), represents the direct costs incurred in acquiring the goods that a company sells during a specific accounting period. It is a critical figure on the income statement, as it directly impacts gross profit and net income.
To calculate the cost of merchandise sold, businesses follow this fundamental accounting formula:
COGS = Beginning Inventory + Net Purchases – Ending Inventory
Let’s break this down:
- Beginning Inventory: This is the value of the inventory a company has at the start of the accounting period. It represents goods that were not sold in the previous period.
- Net Purchases: These are all additional inventory purchases made during the period, including freight-in and minus any purchase returns or discounts.
- Ending Inventory: This is the value of unsold inventory at the end of the accounting period. It is subtracted because it represents goods not sold and should not be included in the cost of goods sold.
By adding net purchases to the beginning inventory, you calculate the total inventory available for sale during the period. Then, by subtracting the ending inventory, you determine the portion of inventory that was actually sold, which is your cost of merchandise sold.
Example:
- Beginning Inventory: $10,000
- Net Purchases: $5,000
- Ending Inventory: $4,000
COGS = $10,000 + $5,000 – $4,000 = $11,000
This formula ensures accurate matching of costs with revenues earned during the period. Overstating ending inventory understates COGS and overstates profit, and vice versa. Thus, understanding this formula is crucial for proper financial reporting and analysis.
Therefore, the correct answer is:
A. plus net purchases minus ending inventory.
