Cost of goods sold statement definition
/What is a Cost of Goods Sold Statement?
A cost of goods sold statement compiles the cost of goods sold for an accounting period in greater detail than is found on a typical income statement. This statement is not considered to be one of the main elements of the financial statements, and so is rarely found in practice. If presented at all, it appears in the disclosures that accompany the financial statements. It can be useful for analysis purposes within a business, to find the causes of changes in the cost of goods sold.
Cost of Goods Sold Formula
The cost of goods sold statement is based on the cost of goods sold formula that is used with a periodic inventory system, which is as follows:
Beginning inventory + Purchases - Ending inventory = Cost of goods sold
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Format of the Cost of Goods Sold Statement
The statement starts with beginning inventory and factors in a variety of items to arrive at the cost of goods sold, which is stated at the bottom of the report. The basic format of the statement is as follows:
+ Beginning inventory
+ Purchases
+ Freight in and freight out
- Purchase returns
+ Direct labor
+ Factory overhead
= Cost of goods available for sale
- Ending inventory
= Cost of goods sold
Also, there are several types of inventory, such as raw materials inventory, work-in-process inventory, and finished goods inventory; they can be listed as line items that aggregate into a single beginning inventory number and a single ending inventory number.
The factory overhead figure in this calculation may be broken down into its component parts, to give better visibility into the different types of costs involved.
How the Cost of Goods Sold Statement is Used
The concept of the cost of goods sold statement is more useful when it is reported in a horizontal reporting format for multiple months, so that a reader can see changes in the report line items over time. It is also useful to present the information in a horizontal format on a percentage basis, so that trends can be more easily seen.
This statement could also be of use to a retailer, which purchases and sells merchandise. In this environment, certain line items would not be used, such as the direct labor and overhead line items.