Calculating the cost of goods sold is not just a matter of adding a few invoices to see what was purchased for the inventory. There is more information that is used to determine the total cost of goods sold. To start with, the company does need to know how much inventory was available and the cost to purchase the inventory for the company. This can be calculated by adding the starting inventory cost and the cost of inventory purchased for a specific period of time. The total provides the company or business with the Cost of Goods Available for Sale. This allows the company to have a starting point.

The company then needs to determine the method they wish to use for calculating the Cost of Goods Sold. The company can use the First-in, First-out (FIFO) method which assumes that the oldest inventory is always sold first. Another option the company has is the Last-in, First-out (LIFO) method in which the last items sold will be the first items out. The other option is that of Average Cost.

When using the LIFO or the FIFO methods, the company needs to keep track of the cost of the goods and use that information to make changes in the amount the item will be sold for according to the purchase price. In the Average Cost method the amount is calculated on an averaging system.

While there are multiple options on calculating the Cost of Goods Sold, it is important to utilize a method and stick with it to maintain consistency in calculating the profit for the company.