Which expression correctly represents the cost of sales formula?

Which expression correctly represents the cost of sales formula?

• A. Opening inventory + Purchases - Closing inventory = Cost of sales
• B. Opening inventory - Purchases + Closing inventory = Cost of sales
• C. Purchases - Opening inventory + Closing inventory = Cost of sales
• D. Closing inventory + Purchases - Opening inventory = Cost of sales

Answer: (A)

The key idea is that cost of sales for a period comes from the flow of inventory: you start with what you have, add what you bought, and subtract what you still have at the end. Opening inventory plus purchases gives you the total goods available for sale during the period. Subtracting ending inventory reveals the amount of inventory that was actually sold, i.e., the cost of goods sold. That’s why opening inventory plus purchases minus closing inventory is the correct expression. Any other arrangement would miscount one side of the flow—either failing to account for the goods available for sale or not properly removing the ending stock—leading to an incorrect cost of sales figure.

The key idea is that cost of sales for a period comes from the flow of inventory: you start with what you have, add what you bought, and subtract what you still have at the end. Opening inventory plus purchases gives you the total goods available for sale during the period. Subtracting ending inventory reveals the amount of inventory that was actually sold, i.e., the cost of goods sold.

That’s why opening inventory plus purchases minus closing inventory is the correct expression. Any other arrangement would miscount one side of the flow—either failing to account for the goods available for sale or not properly removing the ending stock—leading to an incorrect cost of sales figure.