How to Figure Cost of Goods Sold

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Now that we've got the basics covered, let's get to the COGS formula: Beginning Inventory + Purchases - Ending Inventory = Cost of Goods Sold. Yep, it's a real mouthful, but trust me, it's easier than it sounds - just remember to add, subtract, and voilà! You'll need to know your beginning inventory (what you had in stock at the start of the period), purchases (what you bought during the period), and ending inventory (what you had left at the end of the period).

For example, let's say you're a coffee shop owner and you want to calculate your COGS for the month. You started with $1,000 worth of coffee beans, bought $3,000 more during the month, and ended with $1,500 worth of beans left over. Using the formula, your COGS would be $1,000 + $3,000 - $1,500 = $2,500 - that's the direct cost of all the lattes you sold!