Determining the Cost of Goods Sold

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The cost of goods sold is usually reported in a separate section of the income statement. In the periodic inventory system, determining the cost of goods sold requires the following steps:

1. All purchases must be totaled.
2. Purchases returns & allowances and purchases discounts are deducted from purchases to determine the net purchase balance.
3. Net purchases plus transportation costs equals cost of goods purchased.
4. Beginning inventory plus cost of goods purchased equals goods available for sale.
5. Goods available for sale minus ending inventory equals cost of goods sold.