Ending inventory is what remains in your stockroom at the end of an accounting period. This number is generating by adding beginning inventory and purchases, then subtracting sold inventory.
How to Calculate the Ending Inventory?
To calculate the ending inventory, the new purchases are added to the ending inventory, minus the cost of goods sold. This provides the final value of the inventory at the end of the accounting period.
The ending inventory is based on the market value or the lowest value of the goods that the business possesses.
Ending Inventory Formula
The formula for the calculation of Ending Inventory is given by the following equation:
Ending Inventory = Beginning Inventory + Purchases -Cost of Goods Sold (COGS)
1- First of all, Calculate the price of goods sold (COGS) by the use of the previous year’s records accounting.
Example: watches cost $10 each to produce, and Ben CA sold 500 watches during the year.
COGS = 500 x $10 = $5000
2- Secondly, determine the result of the last inventory balance which will be a reference point for the calculation of the new, purchased or produced, inventory amount’s.
Ben CA had 700 watches in stock at the end of the previous accounting period, and produced a further 900 watches during the next year.
Ending inventory = 700 x $10 = $7000.
New inventory = 900 x $10 = $9000
3- After that you must add the final inventory and the price of goods
$5000 + $7000 = $12000
4- Finally, for computing the beginning inventory, you can substract the amount of the purchased inventory from the result.
$12000 – $9000 = $3000
Calculating ending inventory
Depending on the system and accounting structure you use for your business, the method of determining the value of your final inventory can be chosen.
Method 1 : FIFO method (First-in, first-out)
This method of calculating ending inventory is based on the principle that the oldest items bought for the production of goods were sold first. Using FIFO method, the cost of your most recent inventory purchases are added to your COGS before your earlier purchases, which are added to your ending inventory.
Method 2 : LIFO method (Last-in, first-out)
The LIFO (last-in, first-out) method is based on the principle that the most recently purchased in-stock items are those that will be sold first. goods that are purchases later are sold earlier.
Method 3 : Weighted average method (WAC)
WAC method is used by dividing the total amount spent on the inventory you have on hand by the total number of items on hand. Weighted average method is typically used when inventory items are practically identical.
In WAC method, the cost of available goods is divided by the number of available units, this provides an averages of the cost of purchased goods in your ending inventory. WAC method is is the best choice your enterprise when you’re keeping track of identical items.
The formula for the weighted average cost method:
Cost of goods available for sale / Total number of units in inventory