COGS = beginning inventory + purchases - ending inventory I don’t understand the purchases part of the equation. For example, if COGS = 80K, beg. inv. = 14K and ending inv. = 10K, purchases = $76K What does the 76K mean?
The logic goes… COGS = cost of purchasing of the goods sold during the period. To find out the net overall purchases, you need to consider the movement in the inventory accounts. Beginning inventory = $14,000 of stock. Ending inventory = $10,000 of stock, so, $4,000 of beginning inventory was sold and never replaced through purchases. Therefore purchases = COGS - $4,000 = $76,000. The reverse would apply if ending was $14,000 and beginning was $10,000. An additional $4,000 was purchased and not sold, therefore, purchases equal COGS + $4,000.
The equation will be simple if you read ‘COGS’ as ‘Sales.’ Say ,at beginning of year i had 1 pen, i bought 4 more pens during the year , and at the end of year i have only 2 pens remaining. So, i have sold 3 pens during the year. Right? (i.e,4+1=5-2=3). Here, 3 will be my sales ( read as COGS). ( Actually COGS = Sales - profit) Hope this clears the equation.
You can look at it from the standpoint of a businessman who sells some sort of items. At the beginning of the period (say a day), you start out with some items, during the course of the day, you bought additional items, and at the end of the day, you still have some items left unsold. How do you calculate the cost of items sold? It is simply adding the beginning stock of items to what you bought during the day and deducting the items left unsold. Now you have 4 things to consider: beginning inventory, purchases, ending inventory and cost of goods sold. If you are given 3 out of the 4 items. It is very simple to determine the 4th item by solving for the unknown. Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold. Therefore, Purchases = Cost of Goods Sold + Ending Inventory - Beginning Inventory Purchases = 80k + 10k - 14k Purchases = 76k.
Thanks I think I got it, I think I was confused by calling it “cost of goods sold” instead of “cost of purchasing of the goods sold” Didn’t realize the purchasing part