How do you calculate the cost of goods sold for a retailer?

Author:
Harold Averkamp, CPA, MBA

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.

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