The cost of sales, also referred to as the cost of goods sold, is a measure of how much it costs a company to sell its products. The cost of sales is also a necessary step when a business is trying to determine the amount of gross profit made in a given period. Not every company calculates cost of sales the same way. For example, trading businesses often use inventory figures to calculate the cost of sales, whereas a service business calculates the cost of sales by looking at the amount of money that goes into providing a service.
Calculating the Cost of Sales
The most straightforward way to calculate the cost of sales is to look at the inventory for any given period. The equation is as follows: Opening Inventory plus Inventory Purchases minus Closing Inventory. For example, if you began a quarter with $800 in inventory stock and purchased an additional $1,200, that would be a total of $2,000 in inventory stock for the quarter. If you had $700 worth of inventory stock at the end of the quarter, the cost of sales for the period would be $1,300. In other words, $800 + $1,200 - $700 = $1,300.
The cost of sales for a period can be used to calculate the amount of gross profit a business makes. Gross profit is the amount of revenue taken in minus the cost of sales. For example, if you calculated your cost of sales at $1,300 and took in $1,700 in revenue, your gross profit would be $400, or $1,700 minus $1,300.