Beginning inventory plus net purchases minus ending inventory equals
A) cost of goods sold.
B) gross profit on sales.
C) total revenue ?
D) the balance of merchandise inventory.
E) net income before sales.
The Correct Answer and Explanation is :
The correct answer is A) cost of goods sold.
Explanation:
The formula for calculating the Cost of Goods Sold (COGS) is:
[
\text{COGS} = \text{Beginning Inventory} + \text{Net Purchases} – \text{Ending Inventory}
]
Here’s how it works:
- Beginning Inventory refers to the value of goods available for sale at the start of the accounting period. This is the ending inventory from the previous period.
- Net Purchases represent the total amount of goods purchased during the period, which includes purchases of raw materials or products, minus any purchase returns, allowances, or discounts.
- Ending Inventory refers to the value of the goods remaining unsold at the end of the period.
Why this equals Cost of Goods Sold:
The cost of goods sold (COGS) represents the direct costs incurred in producing or purchasing the goods that were sold during the period. The calculation starts with the beginning inventory (items on hand at the start of the period) and adds the net purchases made throughout the period. Subtracting the ending inventory (items still unsold at the end of the period) gives the total cost of the goods that were sold. This is the amount spent on the goods that have left the business.
In accounting, the COGS is a crucial expense because it directly affects the gross profit. Once the COGS is subtracted from total sales revenue, it provides the gross profit, which reflects the profitability of the core business operations before accounting for other expenses (like operating expenses or taxes).
The other options are incorrect because they refer to different aspects of a company’s financials:
- B) Gross profit on sales: This is the result of subtracting COGS from total revenue, not the formula in question.
- C) Total revenue: This refers to the total sales made, which is unrelated to the cost of goods sold calculation.
- D) Balance of merchandise inventory: This refers to the value of goods on hand, not the cost of those sold.
- E) Net income before sales: This would be income, not the cost of sold goods.