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.
