How is the cost of goods sold (COGS) calculated?

The cost of goods sold (COGS) is calculated using the formula:

COGS = Beginning Inventory + Purchases - Ending Inventory.

This formula captures the flow of inventory within a specific accounting period. Beginning Inventory represents the value of goods available for sale at the start of the period. When you add Purchases, you're including all additional inventory that was acquired during that period. To find the actual cost of goods sold, you then need to subtract Ending Inventory, which indicates the inventory remaining at the end of the period.

Essentially, this calculation tells you how much of the initially available and purchased inventory has been sold during the period, providing a clear picture of the cost associated with the goods that have left the company. This is vital for accurate financial reporting and profitability analysis.