Compute goods available for sale and identify what must be assigned to COGS versus ending inventory
Practice: From GAFS to Ending Inventory
Now you'll work through three scenarios on your own. For each one, calculate Goods Available for Sale, estimate the possible COGS range, and find Ending Inventory.
Beginning Inventory + Purchases = Goods Available for Sale (GAFS)
GAFS - COGS = Ending Inventory
Cost layers form when purchases happen at different prices
The same sale can produce different COGS depending on which layer(s) you pull from
In Phase 3, you walked through Sarah's timeline day by day. You saw that when costs change, the same number of units sold can produce different COGS values depending on which inventory layer the units came from.
Here's the puzzle you'll solve today:
Example: You have 36 units available for sale worth $746 total. You sell 20 units.
Question: What's COGS? It depends! Could be anywhere from $360 to $440 based on which 20 units you sold.
In this activity, you'll calculate the range of possible COGS values for each scenario. This shows why businesses need consistent rules (FIFO, LIFO, etc.) — without them, you'd be guessing every time you report your numbers.
Mistake: Forgetting to include Beginning Inventory when calculating GAFS
Mistake: Only calculating one COGS value instead of the full range
Mistake: Forgetting that Ending Inventory + COGS must equal GAFS
Mistake: Using the wrong cost per unit when estimating COGS range
Work through all three scenarios below. For each one:
- Calculate Goods Available for Sale (units and total value)
- Estimate the COGS range (minimum to maximum possible)
- Calculate the corresponding Ending Inventory range
Beginning Inventory
12 units @ $18
= $216
Purchases
15 units @ $20 = $300
10 units @ $22 = $220
Units Sold
20 units
Before you can figure out COGS or Ending Inventory, you need to know the total amount of inventory that was available to sell.
Calculate:
Remember the formula:
Ending Inventory = Beginning Inventory + Purchases - COGS
or: Ending Inventory = Goods Available for Sale - COGS
Discussion prompt (3 minutes):
- Which scenario had the widest COGS range? Why?
- Why would a business owner care about the difference between the minimum and maximum COGS?
- If you were Sarah presenting to an investor, would you want higher or lower COGS? Why?
You've now seen that when inventory costs vary, the same sales can produce different financial results depending on cost assignment. The difference between minimum and maximum COGS can be significant — sometimes hundreds or thousands of dollars.
This is exactly why businesses adopt consistent inventory valuation methods like FIFO and LIFO. In Lesson 3, you'll learn the formal rules for each method so you never have to guess.