Ending Inventory Formula

Formula of Ending Inventory (Table of Contents) 

• What is Ending Inventory Formula?
• Example of Ending Inventory Formula
• Ending Inventory Formula Calculator

What is Ending Inventory Formula?

Ending Inventory formula calculates the value of goods available for sale at the end of the accounting period. Usually, the Ending Inventory is recorded on the balance sheet at the lower of cost or its market value.

The formula for the calculation of Ending Inventory is given by the following equation:

Ending Inventory also Known as Closing Stock and normally comprises three types of Inventory namely:

• Raw Materials
• Work in Process (WIP)
• Finished Goods

Different Methods for Calculating Ending Inventory

Firm’s value Ending Inventory based on any of the three methods mentioned below:

#1 – FIFO (First in First Out Method)

Under First in First Out 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 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 result in closing Inventory reported by the Business on its Balance Sheet depicts the cost of 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 Ending Inventory 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 equation is valued by multiplying the average cost per unit by the number of units available at the end of the reporting period.

Examples of Ending Inventory Formula (with Excel Template)

Let’s see some simple to advanced examples of the calculation of Ending Inventory Formula.

Ending Inventory Formula – Example #1

ABC Limited started the production with opening Inventory worth $100000. During the month of January ABC Limited purchased Inventory amounting to $50000 on 16^th January and $30000 on 25^th January. On 29^th January ABC Limited sold products amounting to $ 120000. Calculate the Ending Inventory for the same.

Based on the above information, the calculation of the Ending Inventory equation is as follows:

So, Ending Inventory will be –

Thus the value of Ending Inventory is $60,000.

Ending Inventory Formula – Example #2

Let’s take one more example to understand how Ending Inventory valuation is done using different methods of Inventory Valuation.

XYZ Limited has furnished the Inventory data for the month March 2018. Do the Calculation of Ending Inventory under the LIFO, FIFO, and Weighted Average Cost Method.

Inventory Data – 

By using the above-given data, do the calculation of the ending inventory 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:

• Ending Inventory= 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:

Ending Inventory= 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
• Ending Inventory= 3 units @ $3.80 per unit= $11.40

Therefore,

Thus we can see the value of Ending Inventory is affected to a large extent by the method of valuation adopted by the business in question.

Ending Inventory Formula Calculator

You can use the following Ending Inventory Calculator.

 

Final Thoughts

Ending Inventory formula 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 a track of the Ending 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 Ending 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).

Recommended Articles:

This has been a guide to Ending Inventory Formula. Here we discuss 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 –

• What is the Gross Profit Ratio?
• Importance of Inventory Current Assets
• LIFO Liquidation
• Formula for Current Assets
• What is Gross Profit?
• Days Inventory Outstanding (DIO)
• Compare Inventory and Stock
• Use of LIFO Reserve
• Compare FIFO vs LIFO