The formula for calculating Cost of Goods Sold is:

The formula for calculating Cost of Goods Sold (COGS) is derived from the relationship between inventory and the flow of goods through a business. COGS indicates the direct costs attributable to the production of the goods sold by a company.

The formula given in the correct answer adds Beginning Inventory to Purchases, which represents all goods available for sale during the period, and then subtracts Ending Inventory. This effectively calculates the total cost of goods that were available to be sold, less the cost of goods that remain unsold at the end of the period.

To understand this, consider that at the start of a period, a company has a certain amount of inventory (Beginning Inventory). During the period, the company purchases additional goods, which means it has more inventory available for sale. However, not all inventory is sold; some remains by the end of the period (Ending Inventory). By subtracting Ending Inventory from the total available for sale (Beginning Inventory plus Purchases), you arrive at the total cost of goods that were actually sold during that period.

This logical flow of inventory accounting ensures that the costs are accurately matched with the revenues generated from those sales, providing a clearer financial picture and aiding in effective financial planning and assessment.