What is the formula for calculating Cost of Goods Sold (COGS)?

The calculation of Cost of Goods Sold (COGS) is essential for understanding a company's profitability and financial performance. The correct formula is derived from the relationship between inventory levels and sales activity. COGS represents the direct costs attributable to the production of the goods sold by a company during a specific period.

The formula "Goods Available for Sale - Ending Inventory" accurately describes how COGS is determined. Goods Available for Sale includes the total amount of inventory that was available to be sold during the period, which is the sum of the beginning inventory and the purchases made throughout the period. By subtracting the ending inventory from Goods Available for Sale, we identify the inventory that has been sold during that period, which constitutes the COGS.

This approach reflects the flow of inventory through the accounting period and highlights the importance of maintaining accurate inventory records to calculate COGS properly. Understanding this formula is crucial for financial reporting, tax calculations, and evaluating a company's operational efficiency.