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 :
The correct answer is A. plus net purchases minus ending inventory.
Explanation:
The Cost of Merchandise Sold (CMS) is a key component in determining the profitability of a business that sells physical goods. To understand how CMS is calculated, we need to examine the relationship between the beginning inventory, purchases, ending inventory, and the CMS.
Formula for CMS:
The basic formula for calculating the Cost of Merchandise Sold is:
[
\text{CMS} = \text{Beginning Inventory} + \text{Net Purchases} – \text{Ending Inventory}
]
This formula outlines the flow of inventory and how goods are used up or sold during a given period.
Breakdown of the Components:
- Beginning Inventory:
This refers to the inventory that a company has at the start of a given accounting period (e.g., the start of the year). This is the same inventory that was left over from the previous period. - Net Purchases:
Net purchases are the total goods acquired during the period, adjusted for returns, allowances, and discounts. It includes all the goods that a company buys during the accounting period to sell. - Ending Inventory:
This is the value of the goods remaining unsold at the end of the accounting period. It is important because it indicates the inventory that hasn’t been sold and therefore shouldn’t be counted as part of the CMS.
Why Option A is Correct:
The Cost of Merchandise Sold is calculated by starting with the beginning inventory (goods the company already has), then adding the net purchases (goods the company acquired during the period), and finally subtracting the ending inventory (the goods left unsold). The idea behind this calculation is that the goods that were available for sale during the period are either sold (counted as CMS) or remain in inventory (counted as ending inventory).
Hence, the correct expression for CMS is:
[
\text{CMS} = \text{Beginning Inventory} + \text{Net Purchases} – \text{Ending Inventory}.
]
This approach ensures that only the goods sold during the period are counted as part of the cost of sales, which is critical for accurate financial reporting and determining profit.
