The cost of goods sold equals beginning inventory plus net purchases minus ending inventory.
a. True
b. False
The correct answer and explanation is:
The correct answer is a. True.
The cost of goods sold (COGS) is a financial metric used to determine the direct costs incurred in producing or acquiring goods that were sold during a specific period. The formula for COGS can be expressed as: COGS=Beginning Inventory+Net Purchases−Ending InventoryCOGS = \text{Beginning Inventory} + \text{Net Purchases} – \text{Ending Inventory}
Explanation:
- Beginning Inventory represents the value of inventory at the start of the accounting period. This is the same as the ending inventory of the previous period.
- Net Purchases include the cost of goods bought during the period, minus any returns, allowances, and discounts. It reflects the total amount spent on acquiring new inventory during the period.
- Ending Inventory represents the value of the inventory left at the end of the period. This is important because it shows how much inventory was not sold and is carried over to the next period.
When combined, these three elements help calculate the cost of goods sold for the period. The formula essentially tracks the movement of goods from the inventory over a given period. Starting with the beginning inventory, we add the purchases made during the period to account for all the goods available for sale. Then, by subtracting the ending inventory (the goods that remain unsold), we are left with the cost of goods that were sold.
This calculation is crucial for businesses, as it directly impacts the gross profit margin. Gross profit is calculated by subtracting the COGS from total revenue. A lower COGS leads to a higher gross profit, indicating better profitability from sales. Understanding how inventory and purchases affect COGS is essential for accurate financial reporting and decision-making in any business.