What is the primary equation for calculating cost of goods sold (COGS)?

The primary equation for calculating the cost of goods sold (COGS) is derived from the relationship between the total goods available for sale and the inventory remaining at the end of the accounting period. The formula effectively calculates the cost of the inventory that has been sold to generate revenue.

By subtracting the ending inventory from the goods available for sale, which is the sum of the beginning inventory and any purchases made during the period, you can determine the cost of the goods that were sold. This provides a clear financial picture of how much it cost the business to sell its products over that period.

Understanding this formula is crucial as COGS directly impacts gross profit and is a vital component of income statements in the accounting and finance practices within HR settings. This knowledge aids in strategic decision-making regarding pricing, inventory management, and overall financial health of the organization.