I Like Accounting

What is our cost of goods sold (COGS)?

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One the things business owners like to focus on is earning profits. Doing so can be hard, but it lets them buy yachts, mansions, and fancy dinners.

There's a lot that goes into calculating profit, but it basically boils down to figuring out how much you earned and subtracting away how much you spent. The remainder is your profit.

Today we're going to look at a small section of the how much you spent section.

The cost of goods sold formula reveals how much the inventory that you sold cost you. It is often the case that companies are continuously buying and selling inventory, so it's not always obvious how much the items sold originally cost.

Nevertheless, it's important to know, because it can be compared against income to see if this business is worthwhile.

Here's the formula:

BEGINNING INVENTORY + PURCHASED INVENTORY - ENDING INVENTORY = COST OF GOODS SOLD

It may seem like a lot remember, so here's a simpler version that they don't teach you in textbooks:

INVENTORY YOU HAD - INVENTORY YOU USED = COST OF GOODS SOLD

This second version makes more sense to me and will get you to the same place, but we'll be sticking with the first formula, since it's the standard.

Question Richard Smith, owner of Michael Jones, inc., is worried about his spending, so he's trying to check the math on his cost of goods sold (COGS) calculations.
  • During production, there was $56 worth of purchases made. The cost of goods sold for the period was $39. The firm's ending inventory was valued at $109.
What was the starting inventory?
Answer