CFA Level IFinancial Statement AnalysisMedium
A company has beginning inventory of $100,000 and purchases $500,000 worth of inventory during the year. Its ending inventory is $120,000. What is the company's Cost of Goods Sold (COGS) for the year?
- A$580,000
- B$480,000
- C$520,000
- D$500,000
Show answer & explanationAnswer & explanation
Correct answer: B. $480,000
The Cost of Goods Sold (COGS) is calculated using the inventory equation: Beginning Inventory + Purchases - Ending Inventory. So, $100,000 + $500,000 - $120,000 = $480,000.
Why the other options are wrong
- A. This incorrectly subtracts beginning inventory from purchases.
- C. This incorrectly adds ending inventory instead of subtracting it.
- D. This equals purchases, ignoring changes in inventory.
Cost of Goods Sold (COGS) Calculation
COGS represents the direct costs attributable to the production of the goods sold by a company during a period, calculated using the inventory equation.
- Key component of the income statement.
- Directly affects gross profit and net income.
- Formula: Beginning Inventory + Purchases - Ending Inventory.
Memory trick: Start with what you HAD, add what you BOUGHT, subtract what's LEFT, to find what you SOLD.