Cost of Goods Sold is calculated by ______________ and then subtracting the ending inventory.

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BlackTom AI · Accepted Answer

First, let me restate the question and options to set the stage for analysis.
Question: Cost of Goods Sold is calculated by __________ and then subtracting the ending inventory.
Answer options:
- adding the opening inventory and the net purchases
- adding the opening inventory and the net sales
- subtracting the net purchases from the opening inventory
- subtracting the net purchases from the net sales

Now, evaluate each option one by one.
Option 1: 'adding the opening inventory and the net purchases' — This aligns with the classic COGS formula rearranged: Beginning Inventory + Net Purchases − Ending Inventory = COGS. By adding opening inventory and net purchases, you accumulate the goods that were available for sale before considering what remains unsold at year end. This option correctly represents the first two components of the COGS calculation.
Option 2: 'adding the opening inventory and the net sales' — Net sales measure revenue from selling goods and do not pertain to inventory costs. Adding opening inventory to net sales would mix cost data with revenue data, which does not produce COGS. This is conceptually incorrect.
Option 3: 'subtracting the net purchases from the opening inventory' — Subtracting net purchases from opening inventory ignores the fundamental idea of adding purchases to inventory to determine availability for sale. Net purchases should be added to beginning inventory, not subtracted, to reflect total goods available for sale. This misrepresents the flow of costs.
Option 4: 'adding the opening inventory and the net purchases' — This is actually the same as Option 1; if there were a distinction, it would need clarification, but as written it repeats the correct approach and is consistent with the standard calculation before subtracting ending inventory.

In summary, the correct approach for the first part of the COGS calculation is to combine beginning inventory with net purchases, giving a total goods available for sale, from which ending inventory is subtracted to arrive at COGS. The incorrect options either mix in revenue data (net sales), misapply subtraction, or fail to reflect the foundational addition of beginning inventory and purchases. The provided correct option matches the established formula structure for COGS calculation.

BBK99E2 - Basic Bookkeeping Level 2 Part 2 - Online Exam

Cost of Goods Sold is calculated by ______________ and then subtracting the ending inventory.

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