In order to derive purchases, we are to use the formula: Purchases = Ending inventory + COGS – Opening inventory From my understanding, we subtract ending inventory from opening inventory to find the change in inventory and therefore the purchases made in inventory during the year. We add COGS bc it’s the cost of the items we sold, which is the cost of the items we bought from suppliers. But how do you know that those items were purchased this year? What if they were items bought from the supplier from the previous year but were sold this year?
Sorry if this question is super confusing! it makes sense in my head but i wasnt sure how to word it out
Natasha, think about the inventory line as a closed system. There is something there at the beginning of the period (opening balance), this amount increases due to Purchases made during the period and falls as inventory (both newly puchased and items already there at the beginning of the period) is handed out to customers (COGS), so:
If we rearrange: Purchases = Closing balance + COGS - Opening balance
It makes absolutely no difference whether the COGS (cost of the items sold during the period) includes items purchased during this period or some previous period … it will usually be a combination of both.
Beginning inventory + purchases = goods available for sale = COGS + ending inventory
We start with some stuff (beginning inventory) and we buy more stuff (purchases); that’s all the stuff we have (goods available for sale). We sell some of our stuff (COGS), and whatever stuff we don’t sell we keep (ending inventory).
