Ending Inventory: Definition, Formula, and Calculation

Do you ever wonder what happens to unsold items at the end of a business period? They become part of the ending inventory, a crucial metric for financial health. This beginner’s guide discusses the definition, formula, and calculation methods of ending inventory.

This topic can be confusing, but we will discuss it through simple explanations. Additionally, we will use easy-to-follow examples to help you understand this crucial element of business functioning. This will set you on the path to understanding more complex financial concepts.

Key Takeaways

• Ending inventory shows the total value of stuff a business hasn’t sold by the end of a certain time, like a month or a year. It helps businesses see how well they’re doing financially, figure out profits, and make smart choices about what to sell in the future.
  
  
• Calculating ending inventory isn’t too tricky. You just add what you started with, add what you bought, and then subtract what you sold. There are different ways to calculate it, like FIFO or Average Cost, but they all need accurate info to work well.
  
  
• Businesses don’t have to do everything on their own. There are services like Stallion that can help with shipping and other stuff.
  

What is Ending Inventory

Ending inventory is the total value of a company’s unsold goods or products available for sale at the end of an accounting period. It’s essentially a snapshot of what stock remains after considering these few elements:

• What the seller had at the beginning (beginning inventory)
  
  
• What they had bought (purchases)
  
  
• What they sold (cost of goods sold)
  

Knowing the value of ending inventory is crucial for businesses. This can help them assess their financial position and calculate profits. Subsequently, they can make informed decisions about future production, inventory costs and sales strategies.

Accounting Period

An accounting period is a specific time frame businesses use to track financial performance. It’s an overview of the company’s financial health at a particular time. Standard accounting periods include:

• Months (months)
  
  
• Quarters (3 months)
  
  
• Years
  

Choosing a suitable period depends on the business size and complexity. Businesses can use shorter periods for closer monitoring or more extended periods for a broader view.

Is Ending Inventory and Closing Inventory the Same?

Yes, ending inventory and closing inventory are the same thing. They both represent the value of unsold goods on hand at the end of an accounting period. Additionally, sellers can use these terms interchangeably in accounting and finance.

What Ending Inventory Formula Can Small Businesses Use?

All businesses use one core formula to calculate ending inventory. It’s straightforward and considers what came in, what went out, and what’s left over:

Ending Inventory = Beginning Inventory + Net Purchases – Cost of Goods Sold (COGS)

What do the components of the formula mean?

Here’s a breakdown of each component:

Beginning Inventory

Beginning inventory refers to the unsold goods at the start of a specific accounting period. It’s like opening up the balance sheet for your stockroom. Imagine it as the leftover inventory from the previous period that you’re carrying forward. This value is crucial because it is a starting point for calculating how much inventory you have on hand throughout the period and how much remains unsold.

Net Purchases

Net purchases refer to the total cost of goods a business acquired during an accounting period, minus any returns or discounts they received. Think of it as the net amount you paid for new stock. Here’s the breakdown:

• Total Purchases. The overall cost of all the goods you bought during the period.
  
  
• Purchase Returns. These are the damaged or incorrect items sent back to suppliers.
  
  
• Purchase Discounts. Any price reductions you received from suppliers for early payment or bulk purchases.
  

Net Purchases = Total Purchases – Purchase Returns – Purchase Discounts

This net amount reflects the cost of the new inventory you added to your stockroom during the accounting period. It’s a critical factor in inventory accounting when determining your ending inventory value.

Cost of Goods Sold (COGS)

Cost of Goods Sold (COGS) is the direct cost of the goods a business sells to customers during a specific accounting period. It’s essentially the total inventory cost you used to sellable inventory and generate sales.

Imagine this: You buy shirts for $10 each and sell them for $20. The COGS for each sold shirt is $10, reflecting the full cost to retail ratio of creating that sale.

A lower COGS compared to sales revenue generally indicates a higher profit margin. You’re efficiently converting your inventory into sales without many leftover costs. COGS is a crucial factor in determining a company’s profitability.

How to Calculate Ending Inventory?

The abovementioned elements are essential when calculating ending inventory. However, what can you do if you add another variable or a missing component?

Here’s how to calculate ending inventory for different situations:

Without Beginning Inventory

Unfortunately, calculating an accurate ending inventory value becomes impossible without a beginning inventory value. The formula relies on the starting point of your stock levels from the previous accounting period to determine what remains at the end of same period.

Here’s why a beginning inventory is crucial:

• Foundation for Calculation. The beginning inventory acts as the baseline for your stock at the start of the period. With this value, you can only track the purchases and COGS relative to your starting point.
  
  
• Impact on Ending Inventory. The beginning inventory directly influences the ending inventory calculation. If you don’t know the beginning value, you essentially have a missing piece in the equation, making it impossible to accurately determine the ending stock value.
  

However, there might be alternative approaches depending on your situation:

Estimate Beginning Inventory

If you have a rough idea of your starting stock value based on historical data or sales trends, you could use an estimate for the beginning inventory. This would approximate the ending inventory, but the accuracy would be limited.

Physical Inventory Count

Consider conducting a physical inventory count to determine your stock amount. This would give accurate inventory counts become your ending inventory for this period. However, it wouldn’t provide the specific value without a previous inventory count for comparison.

Without Net Purchases

Like the beginning inventory valuation method, getting an accurate ending inventory value is impossible without a net purchase figure. Here’s why net purchases are essential:

• Represents Added Stock. Net purchases reflect the total cost of new goods you brought into your inventory during the accounting period. Without this value, you wouldn’t know how much stock you added to what you already had initially.
  
  
• Calculates Goods Available for Sale. One part of the ending inventory formula involves calculating the total cost of goods available for sale. This requires adding the beginning inventory to the net purchases. Without net purchases, you can’t determine the complete picture of the goods you have available to sell.
  

However, there might be alternative approaches depending on your situation:

Use a Different Method

You have a specific scenario and reliable data on the COGS + ending or beginning inventory. Alternate inventory tracking and valuation methods are available that you can explore with an account. These methods can be:

• Real inventory method
  
  
• Gross profit method
  

You can incorporate available data points, but they can come with their own limitations. Additionally, they might need more information for accurate details.

Estimate Inventory Purchases

Let us say you know the recent inventory purchases made during the period based on supplier invoices or historical trends. You could estimate the net purchase value, allowing you to use the standard formula. However, be aware that the ending inventory result would also be an estimate.

Overall, the most reliable approach is to have both of these elements. If these are unavailable, there are a few options you can consider:

• Consult with an account to explore alternative methods.
  
  
• Consider gathering the missing data points for a more accurate calculation.
  

Using the First In, First Out Method

The First-In, First-Out (FIFO) method assumes that the items you buy first are the ones you sell first. This technique can be useful for businesses that deal with perishable goods or where older stock may deteriorate or become outdated. Here’s how to calculate ending inventory using FIFO:

Gather Your Information

You’ll need the following:

• Inventory records. This should detail your inventory purchases throughout the period, including the quantity, cost per unit, and date of each purchase.
  
  
• Sales data. This should show the quantity of each item sold during the period.
  
  
• Beginning inventory. This is the value (and potentially quantity) of your unsold goods at the start of the accounting period.
  

Track Inventory Flow

Organize your inventory purchase records chronologically, with the earliest purchases at the top. Inventory management software can help you check the flow. Then, analyze your sales data and identify which items you sold and their quantities.

Apply FIFO Method

Imagine you’re taking items out of a queue (FIFO). When a sale happens, you’ll “sell” from the oldest purchase at the beginning of your inventory records. As you “sell” items from your records, reduce the remaining quantity for that particular purchase. Keep track of the total cost associated with the “sold” items based on their selling price.

Calculate Ending Inventory

Once you’ve processed all the sales data, look at your remaining inventory records. These represent the unsold items which become your inventory. Calculate the ending inventory value by multiplying the remaining quantity of each item by its corresponding purchase cost. Sum the values of unsold items to get the total ending inventory value based on FIFO.

For Example:

Imagine you run a clothing shop that sells sundresses. In January 2023, you have 20 sundresses in stock from December 2024, each costing you CAD 1. Thus, your beginning inventory is at CAD 20. During January, you make two sundress purchases:

• Purchase 1: On January 10, you buy 30 sundresses at CAD 1.20 each, for a total cost of CAD 36.
  
  
• Purchase 2: On January 20, you buy another 40 sundresses at CAD 1.30 each, for a total cost of CAD 52.
  

Throughout January, you sold a total of 50 sundresses.

Steps to Calculate Ending Inventory Using FIFO

1. Identify the Sales and Cost of Goods Sold (COGS):
   
   • Sales: 50 units
   • Cost of Goods Sold (COGS) using FIFO: We need to determine the cost of the 50 units sold.
     
2. Determine the Cost of Goods Sold:
   
   • From the inventory data provided:
     • Beginning Inventory: 20 units at CAD 1.00 each
     • Purchase 1: 30 units at CAD 1.20 each
     • Purchase 2: 40 units at CAD 1.30 each
       
3. Let’s calculate the COGS:
   
   • First, we use the entire Beginning Inventory:
     • 20 units from Beginning Inventory at $1.00 each = CAD 20.00
       
   • Next, we use 30 units from Purchase 1:
     • 30 units from Purchase 1 at CAD 1.20 each = CAD 36.00
       
   • Therefore, the total COGS for 50 units sold is:
     
     • 20 units X CAD 1.00 each + 30 units X CAD 1.20 each = CAD 20.00 + CAD 36.00 = CAD 56.00
4. Calculate Ending Inventory:
   
   • We started with:
     • Beginning Inventory: 20 units at CAD1.00 each
     • Purchase 1: 30 units at CAD 1.20 each
     • Purchase 2: 40 units at $1.30 each
       
   • After selling 50 units:
     • We sold all 20 units from Beginning Inventory.
     • We sold all 30 units from Purchase 1.
     • We did not sell any units from Purchase 2.
       
5. The remaining inventory is from Purchase 2:
   • Remaining from Purchase 2: 40 units at CAD 1.30 each

Final Calculation

Ending Inventory (FIFO):

• Units remaining: 40
• Cost per unit: CAD 1.30
• Total ending inventory value: 40 units X CAD 1.30 each = CAD 52.00

Summarized Equation:

This breakdown should help clarify how the ending inventory is calculated using the FIFO method with the given data.

Explanation:

1. Total Available for Sale. We start by summing the quantities from the starting inventory and all purchases (90 sundresses).
   
   
2. Cost of Goods Sold (FIFO). Since we’re using FIFO, we assume the first 50 sundresses sold come from the earliest purchases. This includes all 20 from the starting inventory (costing $1 each) and 30 from Purchase 1 (costing $1.20 each). We calculate the total cost for each source and then add them up to the total cost of goods sold.
   
   
3. Ending Inventory (FIFO). After selling 50 sundresses, we’re left with 40 sundresses, all of which come from Purchase 2 (since FIFO assumes we sold the older stock first). The ending inventory value is calculated by multiplying the remaining quantity (40) by the unit cost from Purchase 2 ($1.30).
   

Using the Average Cost Method

The Average Cost Method calculates the ending inventory balance sheet inventor by assuming all similar items in your stock have a uniform cost, regardless of when you bought them. Here’s how to calculate ending inventory using this method:

Gather The Figures

Begin by gathering all these details.

• Starting Inventory. The value of your unsold goods at the start of the accounting period.
  
  
• Net Purchase. The total COGS you bought during the period minus any returns or discounts.
  
  
• Unit Sales. The total number of units sold during the period. (Optional, but can simplify calculations if you have it)
  

Calculate Weighted Average Cost Method

This is the average cost you assign to each unit in your inventory, considering both Starting inventory and new purchases.

• Formula. Weighted Average Cost Per Unit = (Starting Inventory + Net Purchases) / Total Units Available for Sale
  
  
• Total Units Available for Sale. This represents all the units you had available to sell during the period. It can be calculated as Starting Inventory (in units) + Units Purchased during the period. (Note: If you have unit sales data readily available, you can use Total Units Available for Sale = Starting Inventory (in units) + Net Purchases / Unit Cost)
  

Calculate Ending Inventory

• Formula. Ending Inventory = Weighted Average Cost Per Unit * Units in Ending Inventory
  
  
• Units in Ending Inventory. This is the number of unsold units you have on hand at the end of the period. You’ll need to conduct a physical inventory count to determine this value.
  

For Example:

Imagine running a phone accessory store. At the beginning of March (starting inventory), you have 20 phone cases on hand, each costing $10 (total value $200). During March, you purchase:

• March 10: 30 phone cases at $11 each (total $330).
  
  
• March 20: 20 phone cases at $12 each (total $240).
  

Throughout March, you sell 45 phone cases (unit sales data available).

How do we find the ending inventory using the average cost method?

1. Calculate Weighted Average Cost Per Unit:

• Total Units Available for Sale = Starting Inventory (20) + Units Purchased (30 + 20) = 70 units.
  
  
• Weighted Average Cost Per Unit = ($200 Starting Inventory + $330 + $240 Net Purchases) / 70 Total Units Available for Sale
  
  
• Weighted Average Cost Per Unit = $770 Total Cost / 70 Units = $11 per unit (average cost)
  
  

2. Find Units in Ending Inventory:

Since we know we sold 45 units and had 70 available, we have 70 – 45 = 25 units remaining in stock.

3. Calculate Ending Inventory:

• Ending Inventory = Weighted Average Cost Per Unit ($11) * Units in Ending Inventory (25)
  
  
• Ending Inventory = $11 x 25 = $275
  

Therefore, your ending phone case inventory would be $275 under the average cost method. This represents the value of the 25 unsold phone cases based on the average cost per unit, considering your initial stock and new purchases during March.

Using the Gross Profit Method

The Gross Profit Method is an estimate of the ending inventory often used for interim reports. It can also be used for situations where obtaining exact inventory figures might be impractical. It leverages your historical gross profit percentage to estimate the COGS and calculate the ending inventory.

Here’s how to calculate ending inventory using the gross profit method:

1. Gather your information:

• Sales. The total revenue generated from selling goods during the period.
  
  
• Gross Profit Percentage. This is a historical percentage figure representing the profit earned after deducting the COGS from sales. You can calculate it using past accounting data (Gross Profit Percentage = (Sales – COGS) / Sales).
  

2. Estimate COGS:

• Formula. Estimated COGS = Sales * (1 – Gross Profit Percentage)
  

3. Calculate Ending Inventory:

• Formula. Ending Inventory = Starting Inventory + Net Purchase – Estimated COGS
  

Here are some important considerations:

• This method relies on a historical gross profit percentage, which may not always be accurate for the current period. Factors like changes in sales mix, pricing strategies, or cost of goods can affect the gross profit percentage.
  
  
• The ending inventory value obtained is an estimate, not an exact calculation.
  
  
• This method is generally not recommended for companies with significant fluctuations in gross profit margins or for finalizing annual financial statements.
  

Note: You’ll still need the beginning inventory and the net income and purchase figures to use this method.

For Example:

You run a shoe store. You don’t have time for a physical inventory count at the moment, but you need an estimate for your ending inventory for July. Here’s what you know:

• Starting Inventory (July 1st): $5,000
  
  
• Net Purchase (July): $8,000
  
  
• Sales (July): $15,000
  
  
• Historical Gross Profit Percentage (based on past data): 40%
  

How do we estimate the ending inventory using the gross profit method?

1. Estimate COGS:

• Estimated COGS = Sales (July) * (1 – Gross Profit Percentage)
  
  
• Estimated COGS = $15,000 * (1 – 0.40)
  
  
• Estimated COGS = $15,000 * 0.60 = $9,000
  
  
  

2. Calculate Ending Inventory:

• Ending Inventory = Beginning Inventory + Net Purchases – Estimated COGS
  
  
• Ending Inventory = $5,000 + $8,000 – $9,000
  
  
• Ending Inventory = $4,000 (estimated)
  

Important Note:

This calculation provides an estimated ending inventory value of $4,000. Remember, this is an approximation based on your historical gross profit percentage. Fluctuations in your actual inventory costs, costs or sales during July could affect the accuracy of this estimate.

A physical inventory count would be ideal for a more precise ending inventory figure. However, the gross profit method can be a helpful tool for interim reports, or obtaining exact inventory figures might be temporarily challenging.

How Can Stallion Help Businesses

Being Canada’s leading shipping provider, Stallion offers various services to handle all aspects of your business shipping needs, including shipping and fulfillment.

• Transportation Management. You can choose the most suitable carriers, negotiate rates, and track your shipment in real time. By streamlining the transportation process, businesses save time and money.
  
  
• Customs Compliance. For international shipping, we can help ensure your shipments comply with customs regulations, avoiding delays and penalties.
  
  
• Technology Integrations. Stallion offers integration with your existing online store platform. It allows you to manage and process shipments seamlessly within your workflow. Aside from that, you can use this platform to review your inventory.
  

Benefits for eCommerce Businesses:

Stallion can be particularly helpful for eCommerce businesses by:

• Offering Lowest Rates. They can help you find cost-effective shipping solutions to remain competitive online.
  
  
• Providing International Shipping. If you want to expand your customer base globally, Stallion can facilitate international shipping with our expertise in customs compliance.
  
  
• Improving Customer Satisfaction. Fast and reliable shipping is crucial for customer satisfaction in e-commerce. Stallion can help ensure your products reach customers promptly and efficiently.
  
  
• Focus on Canadian Businesses. The information I found suggests Stallion has a focus on the Canadian market. This could be a good fit for businesses located in Canada.
  

Final Thoughts

Ending inventory may seem like a simple concept, but it’s a key metric for financial health. By understanding the formula and how different valuation methods impact the value, you gain insights into your stock management, profitability, and future purchasing decisions. It’s like taking a snapshot of what you have left after the sale, revealing valuable information to steer your business forward.