Formula to Calculate Ending Inventory
Ending Inventory formula calculates the value of goods available for sale at the end of the accounting period. Usually, it is recorded on the balance sheet at the lower of cost or its market value.
- Raw Materials
- Work in Process (WIP)
- Finished Goods
3 Methods to Calculate the Ending Inventory
Firm’s value Ending Inventory calculation based on any of the three methods mentioned below:
#1 – FIFO (First in First Out Method)
Under FIFO Inventory Method, 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 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 compared to the other methods.
#2 – LIFO (Last in First Out Method)
Under Last In First Out Inventory Method, 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 depicts the cost of the earliest items purchased. Ending Inventory is valued on the Balance Sheet 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, it will be lower.
#3 – Weighted Average Cost Method
Under this, the average cost per unit 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 period.
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Examples (with Excel Template)
ABC Limited started the production with an opening Inventory worth $100000. During the month of 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 the month of 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 7 units sold at the unit cost of the first units purchases and the balance 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 7 units sold at the unit cost of the last units purchases and the balance 3 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 7 units sold at the average unit cost of goods available and the balance 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 =||0|
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 period 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, and any inaccurate measure of Ending Inventory will result in financial implication in the new reporting period as well.
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 Assets, Working Capital, Total Assets, etc.) which will ultimately impact the various important financial ratios (namely, Current Ratio, Quick Ratio, Inventory Turnover Ratio, Gross Profit Ratio, and Net Profit Ratio to name a few).
This has been a guide to Ending Inventory Formula. Here we learn how to calculate the Ending Inventory using FIFO, LIFO, and Weighted Average Cost Method along with practical examples. You can learn more about Accounting from the following articles –