Learn how to calculate ending inventory using the ending inventory formula. Understand how to find the cost of ending inventory using different methods.
Updated: 11/21/2023
Ending Inventory | Overview, Formula & Calculation
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Calculating Ending Inventory - A Business Case:
Below is a business case that will allow you to apply your ability to calculate ending inventory.
You are the chief accountant at ABC Parts Ltd, a company that makes bolts used in various industrial processes. The company usually determines its ending inventory by performing an inventory count at the end of every period. On December 31, 2019, the day of the inventory count, there is a gas leak that breaks out in the warehouse. None of the inventory was damaged, however for safety reasons, you or any employees are not allowed in the warehouse. So the annual inventory count will have to be delayed. The company is in a hurry to produce financial statements and needs some preliminary numbers. Inventory is an important number because management is always worried about having too much on hand, or too little. You therefore turn to your computer at pull up some financial information that can be used to compute ending inventory. Here are the numbers that you found:
| Item | Balance ($) |
|---|---|
| Inventory balance at December 31, 2018 | 120,350 |
| Inventory balance at December 31, 2019 | unknown |
| Purchases made during the year | 40,000 |
| Purchase returns | 2,160 |
| Cost of goods sold | 65,015 |
Required:
Compute ending inventory at December 31, 2019.
Solution:
Beginning Inventory + Net Purchases - Cost of Goods Sold (or COGS) = Ending Inventory
=120,350 + (40,000 - 2,160) - 65,015
=$93,175
How do you find beginning and ending inventory?
Beginning inventory is equal to the previous period's ending inventory. Ending inventory is calculated with the formula: beginning inventory + net purchases - COGS, where COGS is the cost of goods sold.
What is ending inventory in accounting?
Ending inventory is the worth of inventory currently in stock at the end of an accounting period (typically a month or quarter). It is listed under assets on a balance sheet.
Table of Contents
ShowInventory is a list or other tracking method of all goods currently in stock. It can be the inventory of a specific finished good, all materials, or any other group of goods. It can include just a specific warehouse or the entire company. Ending inventory refers to the inventory currently on hand at the end of a financial cycle. This cycle may be on a monthly basis, a quarterly basis, or a yearly basis, depending on the accounting methods and needs of the company. When calculating the financial status of a company, knowing the ending inventory is important to help calculate how much money is currently being held in storage in the form of goods. The ending inventory is often listed on a company's balance sheet. There are a few different ending inventory formulas used to calculate the ending inventory.
Preparing and Reading Balance Sheet
A balance sheet is a listing of a company's assets, liabilities, and anything else that affects the financial health of the company. In other words, it explains what a company owns and what a company owes. Assets include cash, inventory, investments, machinery, furniture, and anything else that the company owns. Liabilities include debts owed, notes payable, accrued expenses, and anything else where a company owes money.
A balance sheet is broken into two sections, assets and liabilities. Assets are often broken up into current assets, long-term (or fixed) assets, and other assets. Liabilities are often broken up into current, long-term, and owner's equity. Inventory, which is the ending inventory for the period of the balance sheet, is found in the assets section under current assets.
| Balance sheet | |||
|---|---|---|---|
| Assets | |||
| Current assets | |||
| Cash | $5,367 | ||
| Accounts receivable | $10,278 | ||
| Inventory | $4,521 | ||
| Total current assets | $20,166 | ||
| Fixed assets | |||
| Property, equipment | $205,784 | ||
| (Less depreciation) | ($15,978) | ||
| Long-term investments | $14,562 | ||
| Total fixed assets | $204,368 | ||
| Other assets | |||
| Deferred income tax | $2,573 | ||
| Total other assets | $2,573 | ||
| Total assets | $227,107 | ||
| Liabilities | |||
| Current liabilities | |||
| Account payable | $3,187 | ||
| Short-term loans | $1,849 | ||
| Income taxes due | $4,879 | ||
| Accrued salary and wages | $12,687 | ||
| Total current liabilities | $22,602 | ||
| Long term liabilities | |||
| Long-term debt | $20,287 | ||
| Total long term liabilities | $20,287 | ||
| Owner's equity | |||
| Owner's investment | $35,798 | ||
| Total owner's equity | $35,798 | ||
| Total liabilities | $78,687 |
In this balance sheet, ending inventory is listed as inventory under current assets and is worth $4,521.
Ending Inventory Formula
To calculate the ending inventory in the balance sheet a few additional pieces of information are needed.
- Beginning inventory: This rolls over from the previous balance sheet. The previous balance sheet's ending inventory is the next balance sheet's beginning inventory.
- Net purchases: The cost of everything purchased for inventory.
- Cost of goods sold (COGS): The income from selling goods.
The ending inventory equation is: {eq}Beginning\:inventory + Net\:purchases - COGS {/eq}.
Another financial document contains COGS, the income statement. Net purchases can sometimes be found on the income statement, other times it is kept in other financial documents. If the inventory listed on the previous balance sheet was $6,243 and on the income statement COGS and net purchases were found to be $20,534 (COGS) and $18,812 (net purchases), then the inventory line on the balance sheet would be calculated as such:
{eq}6243+18812-20534=4521 {/eq}.
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The ending inventory formula is fairly straightforward, but without all of these numbers easily found in the financial document businesses may wonder how to calculate ending inventory. There are a few different methods that can be used to calculate ending inventory. Two main methods are:
- Gross profit method
- Retail inventory method
These methods generally use the same ending inventory formula seen above but arrive at the numbers used in different ways.
The Gross Profit Method
Tracking how much purchases cost for the period is just a matter of keeping track of costs. Finding the beginning inventory is just a matter of keeping track of the previous period's ending inventory. Calculating COGS is one of the steps in the ending inventory formula that isn't quite as straightforward. If this number isn't readily available from an income statement, then there needs to be a method to calculate COGS. The amount earned from sales probably isn't how much was actually spent to make that product (profit and other costs are often included in the sales price). So, COGS cannot be determined simply by tracking money earned from sales.
The gross profit method estimates COGS by using historical gross profit percent and multiplying one minus the gross profit percent by the income from sales. If the historical gross profit percentage is 60%, then sales would be multiplied by {eq}1-0.6=0.4 {/eq}, 0.6 is found by taking the percent (60) and dividing it by 100.
The steps to find ending inventory using the gross profit method are:
- Use the previous ending inventory amount as this period's beginning inventory
- Track all purchases during the period and sum up the purchases to find net purchases
- Track all sales during the period and sum up the sales to find total sales
- Determine the gross profit percentage, divide it by 100, and take one minus the result
- Multiply the resulting decimal by total sales, this is the estimated COGS
- Add beginning inventory to net purchases and subtract estimated COGS
Example 1: How to Find Ending Inventory
Business ABC produces windows. They use a monthly balance sheet to track income and expenses. In February, the ending inventory was listed as $15,479. During the month of March, purchases totaled $102,546. During March, total sales equal $181,430. Historically, the gross profit percentage has been 62%. The ending inventory for the month of March needs to be calculated.
- Beginning inventory = $15,479
- Net purchases = $102,546
- Total sales = $181,430
- Gross profit percentage = 62%, divided by 100 = 0.62, {eq}1-0.62=0.38 {/eq}
- {eq}0.38 \times 181430 = 68943 {/eq}
- {eq}15479+102546-68943=49082 {/eq}
The ending inventory for March is $49,082
The Retail Inventory Method
The retail inventory method is another method used to calculate ending inventory. As the name implies, this method is often used by retailers or businesses who aren't producing goods, but are selling goods. Once again, the cost of purchases and beginning inventory is fairly straightforward, but the number used for COGS is calculated using a different method.
COGS, or in this case cost of sales is a more accurate description, is calculated by using the cost-to-retail percentage. The cost to retail percentage is how much products are marked up. The formula is {eq}\frac{Purchase\:price}{Retail\:price} {/eq}. This formula really only works if all products are marked up by the same percentage. Things such as sales or discounts can throw this ratio off, but in many instances, even if there were some sales or if some products are marked up higher or lower, this could still be a good method to estimate the cost of sales.
The cost to retail percentage is then multiplied by the total income from sales. The steps to using this method are:
- Use the previous ending inventory amount as this period's beginning inventory
- Track all purchases during the period and sum the purchases to find net purchases
- Track all sales during the period and sum up the sales to find total sales
- Calculate the cost to retail percentage
- Multiply total sales by cost to the retail percentage (divided by 100) to find the cost of sales
- Add beginning inventory to net purchases and subtract the cost of sales
Example 2: Cost of Ending Inventory
Store XYZ sells computers. They use a quarterly balance sheet to track finances. In quarter two, the ending inventory was worth $24,873. They are now calculating the ending inventory for quarter three. In quarter three, they had purchases that total $48,165 and sales that total $159,427. The typical purchase price of a computer is $1,863 and the typical retail price is $2,867. Total sales for this quarter were $104,798. Using the retail inventory method the ending inventory can be calculated as:
- Beginning inventory = $24,873
- Net purchases = $48,165
- Total sales = $104,798
- Cost to retail percentage: {eq}\frac{1863}{2867} = 0.65 {/eq}
- Cost of sales: {eq}0.65 \times 104798 = 68118 {/eq}
- Ending inventory: {eq}24873+48165-68118=4920 {/eq}
The ending inventory is worth $4,920.
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Ending inventory is the worth of all products at the end of an accounting period (often a month or quarter). It is listed on the balance sheet, or a listing of a company's assets and liabilities, under assets. Assets include cash, inventory, and anything that a company owns. Liabilities include notes payable, loans, and anything that a company owes. Ending inventory is calculated using the formula: {eq}Beginning\:inventory + Net\:purchases - COGS {/eq}, where COGS is the cost of goods sold.
COGS can be found on the income statement or it can be estimated using a couple of different methods. The gross profit method is often used for businesses that produce goods and estimate COGS using historical gross profit margin. The retail inventory method is used by retailers. Instead of estimating COGS, it estimates the cost of sales by using the typical retail markup percentage.
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Video Transcript
Ending Inventory Defined
Sarah, a recent MBA graduate, just received her first real job since graduating from business school. She got a job at a manufacturing company called ACME Lumber Yard, where they sell timber to various real estate development firms. Her first assignment is to calculate the ending inventory for all the lumber that is in stock. Ending inventory is the value of goods available for sale at the end of the accounting period.
Being a very eager and productive member of the workforce, Sarah knows in order to successfully report ending inventory, she'll need to look at the previous balance sheet for ACME Lumber Yard.
What Is a Balance Sheet?
 |
But what exactly is a balance sheet? A balance sheet is a summary of a company's assets, liabilities, and shareholders' equity for a given accounting period. The owners (also known as the investors) use the data as a measure of how the company stands in regards to current assets (or items owned by the company) and liabilities (or items that are in accounts-payable status). Here are a few examples of assets and liabilities:
Assets (on the positive side of the balance sheet)
- Inventory
- Cash
- Office equipment
- Computers
- Company vehicle
Liabilities (on the negative side of the balance sheet)
- Notes payable
- Accounts payable
- Taxes
- Unearned revenue
This is where the term 'balance sheet' is derived. These transactions account for all of the pluses and minuses that occur within a specified accounting period.
Ending Inventory Calculation
Sarah recalls that calculating ending inventory is pretty straightforward but can be tricky if you are not careful. There are other components that make up this simple equation.
Beginning Inventory + Net Purchases - Cost of Goods Sold (or COGS) = Ending Inventory
Beginning inventory is monetary values that a company assigns to their current inventory. This total will equal the ending inventory of the previous accounting period. Beginning inventory is found on the balance sheet.
Net Purchases are new inventory that was purchased during the current accounting period. A company will need to maintain accurate bookkeeping to maintain records of purchases obtained. This is the gross purchase amount minus any discounts, returns, and allowance.
For example, let's say for the previous accounting period, ACME made a purchase for $4,500 on terms of 2/10 net 30 and there is a return of $150. This means the full amount has to be paid within 30 days (net 30), but ACME has the option take a 2% discount if the full amount is paid within 10 days (2/10):
Gross Purchase: $4,500
Less purchase return: $150
Less purchase discount: $90
Net Purchase: $4,260
COGS - This amount is the cost related to the purchase or production of a product. This is known as direct cost and can include cost of raw materials, supplies for productions, packaging cost, etc. Some companies also include indirect costs, such as depreciation of equipment, labor costs, and salaries of project supervisors.
Sarah's Data
Sarah reviews the inventory log, salary compensations, receipts for equipment, and various company records in order to obtain all of the information that is needed to calculate ending inventory:
Beginning inventory - $20,000
Net purchases - $10,000
COGS - $12,000
$20,000 + $10,000 - $12,000 = $18,000 (ending inventory)
Lesson Summary
Let's review. Inventory items are the assets owned by a company and intended to be resold or are raw materials and parts that are purchased to be used in producing goods and products that are resold. Ending inventory, the value of goods available for sale at the end of the accounting period, plays an important role in reporting the financial status of a company and can best be figured out using the equation, Beginning Inventory + Net Purchases - Cost of Goods Sold (or COGS) = Ending Inventory.
Refresh Your Memory
 |
- Ending inventory: the value of goods available for sale at the end of the accounting period
- Balance sheet: a summary of a company's assets, liabilities, and shareholders' equity for a given accounting period
- Assets: items owned by the company
- Liabilities: items that are in accounts-payable status
Learning Outcomes
Going through this lesson on ending inventory will prepare you to:
- State the definition of ending inventory
- Contrast assets and liabilities on a balance sheet
- Solve for the ending inventory
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Ending Inventory | Overview, Formula & Calculation
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