How is the cost of goods sold calculated?

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The cost of goods sold (COGS) is calculated using a formula that reflects the flow of inventory over a period. The correct calculation involves taking the value of the beginning inventory, adding any purchases made during the period, and then subtracting the ending inventory. This formula provides an accurate portrayal of the total cost of inventory that was sold during that timeframe.

Beginning inventory represents the inventory on hand at the start of the period, and purchases are any additional goods bought during that period. By subtracting ending inventory, which is the stock remaining at the end of the period, the calculation effectively captures only the items that were sold. This method is essential for providing an accurate measure of COGS, which in turn impacts gross profit and overall profitability on a financial statement. Understanding this calculation is fundamental for tax preparers when analyzing a business’s financial health.

Other options do not correctly reflect this inventory calculation. Ending inventory minus beginning inventory does not account for purchases, while purchases plus labor minus depreciation does not represent the cost of goods sold accurately, as it includes expenses unrelated to inventory. Labor plus supplies plus gross receipts does not provide a clear calculation for COGS; rather, it reflects broader operational expenditures.

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