Closing Inventory and the
Cost of Goods Sold Formula

Now, let’s look at a summary of the figures we have calculated from these three methods: 

We can work out some very useful formulas using these figures…

The closing inventories can always be calculated as follows:

If we switch around the equation to make cost of goods sold the subject, we have a formula for working this out:

Try these two formulas using the above table and you will see that they work every time.

For example, with the FIFO figures, we can see that we had 0 inventories to start with, plus we purchased $1,800 worth of goods. Of these $1,800, we sold $700, so we were left with $1,100 closing inventories. Using the same figures, we can see that we purchased $1,800 worth of goods and were left with $1,100, so we must have sold $700 worth of goods (the cost of goods that we sold).

The last formula above is actually well known - it is called the cost of goods sold formula or the cost of sales formula.

Almost every accounting student I have encountered has had to memorize this formula because they simply didn't understand what it means and how it works in practice. The explanations above should make it easier for you to understand and work with this key formula.

Once we have calculated our gross profit from the sales and cost of goods sold, we add other income to this and deduct general business expenses from this, to arrive at our net profit