Cost of Goods Sold

According to the accounting matching principle Income Statement must reflect only cost of actually sold inventory.

Unsold inventory must be reflected in the Balance Sheet as asset belonging to the company as of particular date.

Cost of Goods Sold is calculated as follows:

Purchases are used if Cost of Goods Sold is calculated for a trading company. For a manufacturing company instead of purchases cost of goods manufactured is used while calculating Cost of Goods Sold.

Trading company Tabella selling tables ends financial year as of 31 December.

• On 1 January 20X7 Tabella had no inventory.

• During the year 20X7 purchases of tables amounted to 350 units costing in total 87500$.

• At the end of year 20X7 Tabella had 50 tables remaining in inventory.

• Selling price of one table is 300$.

What is Gross Profit of Tabella for the year 20X7? Solution: Gross profit is calculated as follows: Gross Profit = Sales - Cost of Goods Sold

• Cost of opening inventory = 0

• Cost of purchases = 87500$

• Cost of closing inventory = 50 units * unit cost, where unit cost is 87500$/350 units. Therefore cost of closing inventory = 12500$

Cost of Goods Sold = 0 + 87500$ - 12500$ = 75000$ If cost of one unit is 250$, number of units sold is 75000$/250$ = 300

• Number of tables sold = 300

• Sales price of one table = 300$

• Sales = 300 * 300$ = 90000$

Gross profit = 90000$ - 75000$ = 15000$

Assume that Tabella during the next year 20X8 acquired 450 tables for the same 250$ each. As of 31 December 20X8 had inventory 120 tables.

What is Gross Profit of Tabella for the year 20X8?

Solution:

• Cost of opening inventory = 50 units * 250$ = 12500$

• Cost of purchases = 450 units * 250$ = 112500$

• Cost of closing inventory = 120 units * 250$ = 30000$

Cost of Goods Sold = 12500$ + 112500$ - 30000$ = 95000$ If cost of one unit is 250$, number of units sold is 95000$/250$ = 380

• Number of tables sold = 380

• Sales price of one table = 300$

• Sales = 380 * 300$ = 114000$

Gross profit = 114000$ - 95000$ = 19000$

Summary of Cost of Goods Sold calculation: