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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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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

Learn More About Harold

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