## Formula for Calculating a Retailer's Cost of Goods Sold

A retailer's cost of goods sold is:

- The cost of the retailer's beginning inventory
*Plus*the cost of its net purchases (purchases minus purchase discounts and purchase returns and allowance) and freight-in*Equals*the cost of goods available*Minus*the cost of its ending inventory*Equals*the cost of goods sold

A second formula for calculating a retailer's cost of goods sold is:

- The cost of the retailer's net purchases including any freight-in
*Plus*the decrease in inventory OR*minus*the increase in inventory

## Example of Calculating a Retailer's Cost of Goods Sold

Assume that a retailer's information includes: net purchases including freight-in is $450,000; beginning inventory had a cost of $50,000; ending inventory had a cost of $60,000.

Using the above information the cost of goods sold is $440,000.

One calculation is: beginning inventory of $50,000 + net purchases of $450,000 = cost of goods available of $500,000 - $60,000 of ending inventory = cost of goods sold of $440,000.

The other calculation is: net purchases of $450,000 minus the increase in inventory of $10,000 = the cost of goods sold of $440,000.

When there is inflation, the retailer must also elect a cost flow assumption in order to determine the cost of the ending inventory, which of course is a factor in the calculation of the cost of goods sold.