can someone refresh my memory on this? so you have BI + P - EI = COGS. what are the mechanics of calculating P again? i thought it was Revenue + EI - BI but apparently i’m wrong. thanks
Always start with the Ending Inventory: EI = BI + Purchases - COGS As such, COGS = BI + Purchases - EI Work around these equation. Most of the time, purchases is given as logically speaking purchases can be determined in a company’s accounts. Revenue is not in the equation and it is only used for calculation of Gross Profit Margins. Hope this helps…
no, i think you misunderstood me. what i am trying to do is calculate the purchase amount without knowing what COGS is. i am ultimately trying to calculate COGS by using the BI + P - EI formula, and i am wondering how P is calculated. like i said, i thought it was rev + EI - BI but it’s not working out.
The only time you can use revenue is when given say gross profit margin (whether abs figure or a %tage) . Then you can calculate COGS. COGS = Rev - GPM COGS = Rev - %(Rev) From there you can worked out Purchases through the formula Purchases = EI + COGS - BI Purchases = EI + (Rev - %(Rev)) - BI That is provided if the question gives you the gross profit margin.
As stated above, if all you have is Revenues, BI, and EI, then you are attempting to calculate a two-variable equation. Doesn’t work unless you can lock one of those down. Revenues alone won’t do it. Revenues and a gross profit margin (so you can calculate COGS off of revenues) will allow you to lock down COGS so you can solve for Purchases.