A company started the year with $10,000 of inventory. Purchases for resale during the year were $20,000. Inventory on December 31 is $5,000. What’s the cost of goods sold? Show Calculation
A. $5,000
B. $10,000
C. $25,000
D. $30,000
E. $35,000
The Correct Answer and Explanation is :
To calculate the Cost of Goods Sold (COGS), we use the following formula:
[
COGS = \text{Beginning Inventory} + \text{Purchases} – \text{Ending Inventory}
]
Step-by-Step Calculation:
- Beginning Inventory: This is the inventory the company starts with at the beginning of the year, which is $10,000.
- Purchases: The company purchased goods during the year for resale, which totals $20,000.
- Ending Inventory: The inventory remaining at the end of the year is $5,000.
Now, let’s plug the values into the formula:
[
COGS = 10,000 + 20,000 – 5,000
]
[
COGS = 30,000 – 5,000
]
[
COGS = 25,000
]
Thus, the Cost of Goods Sold (COGS) for the company is $25,000.
Explanation:
The Cost of Goods Sold represents the total cost of inventory that was sold during the year. To find it, we add the purchases made during the year to the beginning inventory and then subtract the ending inventory (because this portion wasn’t sold).
- The beginning inventory is the stock the company already had at the start of the period.
- Purchases are the new goods acquired throughout the year for resale.
- Ending inventory refers to the stock that remained unsold at the end of the year.
So, $25,000 represents the cost of the goods that were sold during the year. This is the answer because it accounts for the inventory that was sold and the remaining inventory value.
Conclusion:
The correct answer is C. $25,000.