| To sum up, the cost of goods sold is found by applying the following formula:
Opening stock value $XX ADD: Cost of purchases ( for manufacturing concern, the cost of production) $XX ——– $XX LESS: Closing stock value ($X) ——– = Cost of goods sold $XX ++++++ In simple terms, to match “ sales” and the “cost of goods sold”, we need to adjust the cost of goods manufactured or purchased to allow for INCREASES OR REDUCTION in stock levels during the period. Simple Illustration: On 1 st January 20XX, ABC Ltd had goods in stock of $10,000. During 20XX, it purchased supplies of $100,000. At 31 st December,20XX, it determined the ending stock as $40,000. (a) What is the cost of goods sold? (b) Compute the gross profit if its sales turnover is $120,000 (a) To compute Cost of goods sold Cost of goods sold= Opening stock + purchases- closing stock Cost of goods sold = $10,000+$100,000-$40,000=$70,000 (a) To compute Gross profit Gross Profit = Sales less cost of good sold Gross Profit = $100,000 – $70,000 = $30,000 |