How is the Cost of Goods Sold (COGS) calculated?

The calculation of Cost of Goods Sold (COGS) is based on understanding how inventory flows through a business and how it impacts financial reporting. The correct approach is to take the beginning inventory, add any purchases made during the period, and then subtract the ending inventory.

This formula reflects the movement of inventory: you start with what you already have (beginning inventory), then you account for what you bought (purchases), and finally, you deduct what remains at the end of the period (ending inventory). This provides a clear representation of the actual goods that were sold during the period.

Thus, the reasoning behind this method is to ensure that only the inventory that has been sold is accounted for in the COGS calculation, aligning sales performance with inventory levels. This is crucial for determining profitability and managing inventory effectively.