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 (also known as cost of goods sold or COGS) is a crucial concept in accounting that represents the direct costs attributable to the production or purchase of goods that a company sells during a specific period.
The basic formula to calculate COGS is:
COGS = Beginning Inventory + Net Purchases – Ending Inventory
Let’s break down each component of this formula:
- Beginning Inventory: This is the value of the inventory that a business has at the start of an accounting period. It’s essentially the leftover stock from the previous period.
- Net Purchases: These include all inventory bought during the period, including freight-in and minus any purchase returns, allowances, or discounts. Net purchases increase the total inventory available for sale.
- Ending Inventory: This is the inventory left unsold at the end of the accounting period. Since this inventory hasn’t been sold, it should not be included in the COGS.
🔄 How It Works in Practice:
Imagine a store starts the year with $10,000 worth of inventory (beginning inventory). During the year, it purchases $5,000 worth of additional inventory (net purchases). At the end of the year, $4,000 worth of inventory is still unsold (ending inventory).
Using the formula:
COGS = $10,000 + $5,000 – $4,000 = $11,000
So, the store sold $11,000 worth of inventory during the year.
📌 Conclusion:
The formula shows that cost of merchandise sold accounts for everything the store had available to sell (beginning inventory + purchases) and subtracts what’s still on the shelves (ending inventory). Thus, Option A is the correct answer:
COGS = Beginning Inventory + Net Purchases – Ending Inventory
Now, here’s an image to visually represent this formula and concept:
