What is the formula for calculating the cost of goods sold?

The formula for calculating the cost of goods sold (COGS) is essential for understanding the expenses associated with products that a business sells during a specific period. The correct formula, which is represented by the first choice, is Opening Inventory + Purchases - Ending Inventory.

This formula works by first taking the value of inventory that is available for sale during the period, which includes the opening inventory at the beginning of the period and any new purchases made throughout the period. Since not all inventory will be sold, it is necessary to subtract the ending inventory, which is the value of products that remain unsold at the end of the period. This calculation accurately reflects the cost of the goods that were actually sold.

In contrast, the other choices do not align with the standard calculation for COGS. For example, subtracting gross profit from sales revenue may provide insights into overall profitability but does not determine the actual cost related to inventory sold. Similarly, calculating COGS by simply taking purchases or altering sales revenue without considering both inventory levels provides incomplete insights into the business's performance. Understanding this formula is crucial for effective inventory management and financial reporting.