Thus, it can be used to slightly compress the calculation of the cost of goods sold. The inventory change figure can be substituted into this formula, so that the replacement formula is: Purchases + Inventory decrease - Inventory increase = Cost of goods sold. The full formula is: Beginning inventory + Purchases - Ending inventory = Cost of goods sold. Inventory change is part of the formula used to calculate the cost of goods sold for a reporting period. The inventory change calculation is applicable to the areas noted below. Inventory Management Where the Inventory Change Concept Applies Example of Inventory Changeįor example, if the ending inventory at the end of February was $400,000 and the ending inventory at the end of March was $500,000, then the inventory change was +$100,000. More commonly, the inventory change is calculated over only one month or a quarter, which is indicative of the more normal frequency with which financial statements are issued. If a business only issues financial statements on an annual basis, then the calculation of the inventory change will span a one-year time period. It is also used in budgeting to estimate future cash requirements. The concept is used in calculating the cost of goods sold, and in the materials management department as the starting point for reviewing how well inventory is being managed. Inventory change is the difference between the inventory totals for the last reporting period and the current reporting period.
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