2. Components of the statement of financial results and their calculation

The Cost of Goods Sold Formula

Method One

The cost of goods sold is calculated using the following formula:
(Beginning Inventory + Cost of Goods) - Ending Inventory = Cost of Goods Sold
At the beginning of the year, the beginning inventory is the value of inventory, which is actually the end of the previous year. Cost of goods is the cost of any items bought or made over the course of the year. Ending inventory is the value of inventory at the end of the year. This formula shows the cost of products produced and sold over the year. This free cost of goods sold calculator will help you do this calculation easily.

Method Two

The cost of goods made or bought is adjusted according to changes in inventory. For example, if 500 units are made or bought but inventory rises by 50 units, then the cost of 450 units is the cost of goods sold. If inventory decreases by 50 units, the cost of 550 units is the cost of goods sold.

Uses of COGS in Other Formulas

The cost of goods sold is also used to calculate inventory turnover, which shows how many times a business sells and replaces its inventory. It’s a reflection of production level and sell-through. The formula for calculating the inventory turnover ratio is:
Cost of Goods Sold / Average Inventory = Inventory Turnover Ratio
COGS is also used to calculate gross margin.

Steps to prepare income statement²

1. Choose Your Reporting Period

Your reporting period is the specific timeframe the income statement covers. Choosing the correct one is critical.Monthly, quarterly, and annual reporting periods are all common. Which reporting period is right for you depends on your goals. A monthly report, for example, details a shorter period, making it easier to apply tactical adjustments that affect the next month’s business activities. A quarterly or annual report, on the other hand, provides analysis from a higher level, which can help identify trends over the long term.