Definition: The cost of goods available for sale is the price paid for inventory that is ready for customers to purchase. In other words, it’s the purchase price of all merchandise that a retailer has ready for sale.
What Does Cost of Goods Available for Sale Mean?
The cost of goods available for sale equation is calculated by adding the net purchases for the year to the beginning inventory.
Beginning Inventory + Purchases = Cost of Goods Available for Sale
This calculation measures the amount of inventory that a retailer has on hand at any point during the year. Managers can use this equation to see the amount of inventory that is in stock and able to be sold to customers.
Although management often uses this formula, it doesn’t typically reflect the true amount of inventory that customers can purchase. Over time inventory become obsolete, damaged, or even stolen. This equation doesn’t take these factors into account. The only way to truly know the actual amount of inventory available is to do an inventory count, but a properly maintained inventory system can keep track of damaged an obsolete goods fairly accurately with reserve accounts.
Retailers aren’t the only business to use this calculation. Manufacturers have to know what inventory they have ready for customers too. Their calculation is a little different because they don’t typically purchase goods from vendors. They produce it, so a manufacturer’s cost of goods available formula would be calculated by adding the beginning inventory with the amount produced during the period.
This calculation is also the starting point for the cost of goods sold equation that is reported on both the company financial statements and the tax return.
Example
Bill’s Retail Outlet has a beginning inventory of $100,000 and he purchases $75,000 of goods during the period. Thus, Bill’s inventory available to customers is $175,000.
