Cost of goods sold

The direct cost of the goods a company actually sold during the period, as opposed to everything it bought or made. The distinction is what inventory accounting exists to handle.

The arithmetic is opening inventory plus purchases minus closing inventory. A trader that started the year with ₹900 crore of stock, bought ₹5,200 crore and ended with ₹1,100 crore consumed ₹5,000 crore.

Indian statements often do not present a single line called cost of goods sold. They show cost of materials consumed, purchases of stock-in-trade, and changes in inventories of finished goods and work in progress as separate lines. Adding those three gives the equivalent figure.

Watch the closing inventory number. It is the single easiest lever on reported gross profit, because every rupee left in stock is a rupee kept out of cost.

The valuation method used for that closing figure matters too, and it is disclosed. Weighted average cost and first-in-first-out give different answers whenever input prices are moving, and the gap widens with inflation. Under rising prices, first-in-first-out charges older and cheaper stock to cost and leaves newer, dearer stock on the balance sheet, which reports higher profit and higher inventory than weighted average would. Neither is wrong. Comparing two competitors using different methods without noting it produces a margin difference that exists only on paper.