From the SOLVED section.  

2.  Post all purchases to COGS.  Periodically, but at least at the end of the year, you value the inventory on hand and do a journal entry.
debit the asset purchases account for that value
credit COGS for that value

Print the P&L
then reverse the journal entry
debit COGS for that same value
credit the asset purchases account for that value 

This last journal entry, moves the value of what was on hand at the end of year back to COGS so the cost will be counted against the new year sales.