Cost of merchandise sold equals beginning inventory plus net purchases less ending inventory.
The correct answer and explanation is:
The statement is True. The cost of merchandise sold (also referred to as Cost of Goods Sold or COGS) can be calculated using the formula:
COGS = Beginning Inventory + Net Purchases – Ending Inventory.
This formula is fundamental in understanding how inventory costs impact a business’s profitability over a specific period.
Here’s how the elements of the formula work:
- Beginning Inventory: This is the value of the inventory at the start of the accounting period. It represents goods that were not sold in the previous period and are carried over into the current period. It includes all goods that were still in stock at the end of the previous period.
- Net Purchases: This refers to the total value of inventory bought during the period. It includes any purchases made minus returns, allowances, and discounts. These purchases increase the inventory available for sale.
- Ending Inventory: This is the value of inventory remaining at the end of the accounting period. It represents the unsold goods in stock after all sales and transfers have been accounted for.
By calculating the difference between the inventory available for sale (beginning inventory + net purchases) and the ending inventory, businesses can determine the cost of the merchandise sold during the period. This is crucial for calculating the gross profit, which is then used to assess the business’s financial performance.
The formula essentially helps to allocate the costs of goods that were sold versus those still on hand, allowing businesses to accurately report their profits and manage their finances effectively. Understanding this relationship is key for inventory management and pricing strategies.