What Is The Ending Inventory Formula?
The Ending Inventory formula refers to the mathematical equation that helps calculates the value of goods available for sale at the end of the accounting period. Usually, it is recorded on the balance sheet at a lower cost or its market value.
The ending inventory value depends on different factors, which are taken into consideration for the formula to ensure the volume of goods available at the end of an accounting period is accurate. These factors or components include the beginning inventory (at the beginning of an accounting year), the purchases, and the sales figures.
Table of contents
Ending Inventory Formula Explained
Ending Inventory is the value of goods or products that remain unsold, or we can say that remains at the end of the reporting period (Accounting periodAccounting PeriodAccounting Period refers to the period in which all financial transactions are recorded and financial statements are prepared. This might be quarterly, semi-annually, or annually, depending on the period for which you want to create the financial statements to be presented to investors so that they can track and compare the company's overall performance. or financial period). It is always based on the market value or cost of the goods, whichever is lower. It makes sense to keep track of the Inventory as the same is carried forward to the next reporting period (Accounting or Financial) and becomes the Beginning Inventory. Any inaccurate measure of Ending Inventory will result in financial implications in the new reporting period.
Also, the valuation of Inventory has a widespread impact on the various line items on the Income Statement (namely, Cost of goods sold, Net Profit, and Gross Profit) and Balance Sheet (namely, Current AssetsCurrent AssetsCurrent assets refer to those short-term assets which can be efficiently utilized for business operations, sold for immediate cash or liquidated within a year. It comprises inventory, cash, cash equivalents, marketable securities, accounts receivable, etc., Working Capital, Total Assets, etc.) which will ultimately impact the various important financial ratios (namely, Current Ratio, Quick Ratio, Inventory Turnover RatioInventory Turnover RatioInventory Turnover Ratio measures how fast the company replaces a current batch of inventories and transforms them into sales. Higher ratio indicates that the company’s product is in high demand and sells quickly, resulting in lower inventory management costs and more earnings., Gross Profit Ratio, and Net Profit Ratio to name a few).
The formula that makes calculating the inventory at the end of an accounting year is given below:
Ending Inventory = Beginning Inventory + Purchases -Cost of Goods Sold (COGS)
It is also known as a closing stockClosing StockClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level. and normally comprises three types of InventoryTypes Of InventoryDirect material inventory, work in progress inventory, and finished goods inventory are the three types of inventories. The raw material is direct material inventory, work in progress inventory is partially completed inventory, and finished goods inventory is stock that has completed all stages of production. namely:
- Raw Materials
- Work in Process (WIP)
- Finished Goods
The firm’s value Ending Inventory calculation is based on any of the three methods mentioned below:
#1 – FIFO (First in First Out Method)
Under FIFO Inventory MethodFIFO Inventory MethodUnder the FIFO method of accounting inventory valuation, the goods that are purchased first are the first to be removed from the inventory account. As a result, leftover inventory at books is valued at the most recent price paid for the most recent stock of inventory. As a result, the inventory asset on the balance sheet is recorded at the most recent cost., the first item purchased is the first item sold, which means that the cost of purchase of the first item is the cost of the first item sold, which results in the closing Inventory reported by the business on its Balance sheet showing the approximate current cost as its value is based on the most recent purchase. Thus in an Inflationary environment, i.e., when prices are rising, the Ending Inventory will be higher using this method than the other methods.
#2 – LIFO (Last in First Out Method)
Under the Last In First Out Inventory MethodLast In First Out Inventory MethodLIFO (Last In First Out) is one accounting method for inventory valuation on the balance sheet. LIFO accounting means inventory acquired at last would be used up or sold first., the last item purchased is the cost of the first item sold, which results in the closing Inventory reported by the Business on its Balance Sheet depicting the cost of the earliest items purchased. Ending Inventory is valued onA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. the Balance SheetThe Balance SheetA balance sheet is one of the financial statements of a company that presents the shareholders' equity, liabilities, and assets of the company at a specific point in time. It is based on the accounting equation that states that the sum of the total liabilities and the owner's capital equals the total assets of the company. using the earlier costs, and in an inflationary environment, LIFO ending Inventory is less than the current cost. Thus in an Inflationary environment, i.e., when prices are rising, they will be lower.
#3 – Weighted Average Cost Method
Under this, the average cost per unitCost Per UnitCost per unit is defined as the amount of money spent by a corporation over a period of time to produce a single unit of a specific product or service, and it takes into account two components in its calculation: variable and fixed costs. It aids in determining the selling price of the company's product or services. is computed by dividing the total cost of goods available for sale. Ending Inventory is valued by multiplying the average cost per unit by the number of units available at the end of the reporting periodReporting PeriodA reporting period is a month, quarter, or year during which an organization's financial statements are prepared for external use uniformly across a period of time in order for the general public and users to interpret and evaluate the financial statements..
Examples (with Excel Template)
Let us consider the following instances to understand how ending inventory is calculated using formula:
ABC Limited started the production with an opening Inventory worth $100000. During January, ABC Limited purchased Inventory amounting to $50000 on 16th January and $30000 on 25th January. On 29th January, ABC Limited sold products amounting to $ 120000. Calculate the Ending Inventory for the same.
So, it will be –
XYZ Limited has furnished the Inventory data for March 2018. Do the ending inventory Calculation under the LIFO, FIFO, and Weighted Average Cost Method.
Inventory Data –
By using the above-given data, do the calculation using all three methods.
Using FIFO Ending Inventory Formula
Since the first purchased units are sold first, the value of the seven units sold at the unit cost of the first units purchases and the balance of 3 units, which is the ending Inventory cost, is as follows:
- = 3 units @ $5 per unit= $15
Using LIFO Ending Inventory Formula
Since the last purchased units are sold first, the value of the seven units sold at the unit cost of the last units purchases and the balance of three units, which is the ending Inventory cost, is as follows:
= 2 units @ $2 per unit + 1 units @ $3 per unit = $7
Using Weighted Average Cost Ending Inventory Formula
Since the units are valued at the average cost, the value of the seven units sold at the average unit cost of goods available and the balance of 3 units, which are the ending Inventory cost, is as follows:
- Average Cost per unit= ($38/10) = $3.80 per unit
- = 3 units @ $3.80 per unit= $11.40
Thus we can see the value of the Inventory is affected to a large extent by the method of valuation that the business in question adopts.
You can use the following calculator.
|Ending Inventory Formula =
|Beginning Inventory + Purchases - Costs of Goods Sold(COGS)
|0 + 0 - 0 =
This has been a guide to Ending Inventory Formula. Here, we explain the concept along with the methods to calculate and examples. You can learn more about Accounting from the following articles –
- Importance of Inventory Current AssetsImportance Of Inventory Current AssetsInventory is a current asset since it facilitates the business operations and involves the raw material and the finished goods, processed and sold daily to generate revenue. Even the company acquires the stock or raw material regularly to ensure smooth functioning of the business.
- Days Inventory OutstandingDays Inventory OutstandingDays Inventory Outstanding refers to the financial ratio that calculates the average number of days of inventory held by the company before selling it to the customers, providing a clear picture of the cost of holding and potential reasons for the delay in the inventory sale.
- Compare Inventory and StockCompare Inventory And StockInventory versus stock refers to the widespread misconception of the terms inventory and stock, which are not synonymous. Inventory is the sum of finished goods, raw materials, and work in progress, whereas stocks are the products sold to customers in any form.
- Differences Between FIFO vs. LIFODifferences Between FIFO Vs. LIFOFIFO implies that the inventory that was added first to the stock will be removed first, whereas LIFO implies that the inventory that was added last to the stock will be removed first.