Question

Desired ending inventory is 25% more than beginning inventory. If purchases total $160,000, which of the following statements is true regarding cost of goods sold (COGS)? Explain.

	A) COGS will exceed cost of goods available for sale.
	B) COGS will exceed purchases.
	C) COGS will equal $55,000.
	D) COGS will be less than purchases.

Answer 1

• Correct Answer is Option ‘D’ Cost of Goods Sold will be less than Purchase amount.

This is because Ending Inventory is MORE than Beginning Inventory which means less has been solved.

• Also, to make it more evident I have provided you with 4 cases below, each with different amount of assumed beginning inventory:

Working		Case 1	Case 2	Case 3	Case 4
A	Beginning Inventory	$                      100,000	$                     150,000	$                50,000	$              200,000
B	Purchases	$                      160,000	$                     160,000	$              160,000	$              160,000
C = A+B	Cost of Goods available for sale	$                      260,000	$                     310,000	$              210,000	$              360,000
D = A + (A x 25%)	Ending inventory	$                      125,000	$                     187,500	$                62,500	$              250,000
E = C - D	Cost of Goods Sold [COGS]	$                      135,000	$                     122,500	$              147,500	$              110,000

• As you can see, the above table shows neither of first three options:

--COGS is not exceeding Cost of Goods available for sale [Option ‘a’]

--COGS is not exceeding Purchases [Option ‘b’]

--Cost is not equal to $ 55,000

• The Option ‘D’ states that COGS will be less than purchases, and it is less than under ALL the cases