Complete Guide to Ending Inventory: Formula, Examples & Calculator
- mark599704
- Dec 16, 2025
- 12 min read
Ending inventory refers to the total value of sellable goods a business has on hand at the end of an accounting period. It’s one of the most important inventory metrics because it directly affects your company’s financial statements, including assets, cost of goods sold (COGS), gross profit, and tax liability. Accurate ending inventory ensures a true representation of your business’s financial health. While companies using modern inventory management or ERP systems can see real-time inventory levels without manually calculating them, they still need to report ending inventory for accounting and compliance purposes. Several methods, such as FIFO, LIFO, and weighted average cost, can be used to calculate ending inventory, and the method you choose impacts both your balance sheet and income statement.
What Is Ending Inventory?
Ending inventory, also referred to as closing inventory, is the total value of goods a business has available for sale at the end of an accounting period. It represents the portion of inventory that has not yet been sold and remains on hand in warehouses, retail locations, or storage. Understanding ending inventory is essential for businesses across nearly all industries. It helps determine current assets, calculate gross profit, and assess the accuracy of inventory management processes. Accurately tracking ending inventory also enables companies to identify whether they need to adjust purchasing or production levels to better match customer demand. In short, ending inventory provides a snapshot of operational efficiency and financial performance at the end of each reporting period.
What Is Inventory Value?
Inventory value is the monetary worth of all the goods a business holds at a specific point in time, including finished products, raw materials, and items currently in production. It is a key metric for evaluating a company’s financial health because it directly affects the calculation of cost of goods sold (COGS), gross profit, and overall asset value. Accurate inventory valuation ensures that financial statements reflect the true cost of inventory and support better decision-making around pricing, purchasing, and production. The method a company uses to value inventory, such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or Weighted Average Cost (WAC), can significantly impact the final inventory value. These methods influence not only profitability on the income statement but also tax liability and inventory reporting on the balance sheet.
Key Takeaways
Ending inventory measures the value of goods a business has available to sell at the end of a given accounting period.
The method used to calculate ending inventory has implications for the company’s balance sheet, profit and tax liability.
Many companies use the first-in, first-out (FIFO) or weighted average cost (WAC) methods for accuracy and simplicity.
The gross profit and retail methods can be used to estimate ending inventory when accurate inventory counts are not feasible.
Inventory management software can automate inventory tracking and simplify the calculation of ending inventory.
Ending Inventory Explained
To calculate ending inventory, a business must first determine how many inventory items it has on hand at the end of the accounting period. This is typically done through automated tracking using inventory management software, which provides real-time updates on stock levels. When needed, these digital records are verified through physical inventory counts to ensure accuracy. Once quantities are confirmed, companies apply an inventory valuation method such as FIFO, LIFO, or Weighted Average Cost to assign a monetary value to those items. This produces the total value of ending inventory, which appears on the balance sheet as a current asset.
In situations where an exact count is difficult or impractical, businesses may estimate ending inventory using historical data, sales records, and cost information. While estimates can be useful temporarily, they should be reconciled with actual counts later to maintain accurate financial reporting.
Why Is Ending Inventory Important?
Ending inventory plays a vital role in business management, accounting, and tax reporting. Because inventory is often one of a company’s largest assets, it must be tracked and valued accurately to reflect the true financial position of the business. The inventory valuation method chosen, such as FIFO, LIFO, or Weighted Average, directly impacts the cost of goods sold (COGS), which then influences gross profit, net profit, and overall tax liability.
Beyond financial reporting, ending inventory has significant strategic importance. For retailers and product-based businesses, knowing exactly how much inventory remains at the end of a period helps inform purchasing decisions, production planning, and pricing strategies. Accurate ending inventory ensures companies can meet customer demand without overstocking, enabling more efficient operations and supporting long-term business stability.
How to Use Ending Inventory?
Ending inventory is more than just a number on the balance sheet; it is a key tool for making smart business decisions. It helps companies check that their physical stock matches their records, ensuring accuracy. Accurate ending inventory is also essential for calculating the cost of goods sold and net income. Additionally, it guides purchasing and production plans, helping businesses avoid overstocking or running out of products. Finally, ending inventory plays a crucial role in preparing financial reports, including balance sheets and income statements. Properly using ending inventory allows companies to save money, manage stock effectively, and operate more efficiently.
Accurate Inventory Counts
Accurate inventory counts are essential for any business. Ending inventory helps track stock by making sure records match the actual products on hand. This reduces costly mistakes like overordering, underordering, or mismanaging stock, which can hurt operations and sales. By regularly comparing inventory counts with sales and purchase data, companies can quickly find and fix errors. Keeping these counts up to date also ensures that inventory systems work correctly, improves forecasting, and gives a clearer view of future stock needs and customer demand.
Calculate Net Income
Ending inventory directly affects a company’s net income because it impacts the cost of goods sold (COGS). When ending inventory is high, COGS goes down, which increases net income. When ending inventory is low, COGS goes up, lowering net income. This shows why accurate inventory calculations are important for financial reporting. Understanding how inventory levels affect profit helps businesses make better decisions about pricing, production, and maximizing profit margins. Regularly calculating ending inventory also ensures financial statements show the true cost of operations and the company’s financial health.
Guide Future Reports
Ending inventory is important for creating accurate financial reports, sales forecasts, and other business insights. It affects balance sheets and income statements because it influences COGS and net income. By tracking ending inventory trends over time, businesses can predict seasonal demand, adjust purchasing, and keep stock at optimal levels. This helps identify slow-moving items, avoid overproduction, and prevent stock shortages. Ending inventory also supports budgeting, cash flow planning, and sales forecasting. Knowing how much cash is tied up in stock helps companies allocate resources better. When used in sales forecasts, ending inventory trends give a clearer view of expected revenue and guide smart financial and strategic decisions.
How to Calculate Ending Inventory?
Calculating ending inventory is a straightforward process that gives businesses insight into how much stock remains at the end of an accounting period. To determine this value, you start with the beginning inventory, add the cost of purchases made during the period and subtract the cost of goods sold (COGS). While the formula itself is simple, it’s important to note that how COGS is calculated, which depends on the inventory valuation method used (FIFO, LIFO, or Weighted Average Cost), can significantly affect the final ending inventory figure.
Ending Inventory Formula:
Ending Inventory = Beginning Inventory + Purchases − COGS |
Key Components of the Ending Inventory Formula
To accurately calculate ending inventory, it's important to understand each part of the formula:
1. Beginning Inventory
This is the value of inventory a business has on hand at the start of the accounting period. It directly carries over from the ending inventory reported in the previous period.
2. Net Purchases
Net purchases represent the total cost of inventory items acquired during the period, including materials, products and supplies added to stock. This figure typically accounts for purchase returns, allowances and discounts as well.
3. Cost of Goods Sold (COGS)
COGS reflects the cost of manufacturing or purchasing the goods that were actually sold during the accounting period. It includes direct materials, direct labor and applicable overhead or the purchase cost of finished goods.
Ending Inventory Methods
There are several methods businesses can use to calculate ending inventory, and each comes with its own strengths and limitations. All of these approaches use the basic ending inventory formula, but they differ in how they assign value to inventory sold versus inventory remaining. Most companies favor FIFO (First In, First Out) or WAC (Weighted Average Cost) because they tend to be more accurate for everyday operations and easier to apply consistently.
1. First In, First Out (FIFO)
The FIFO method assumes that the first items purchased are also the first ones sold. This means that COGS is calculated based on the cost of the older inventory, leaving more recently purchased (and often more expensive) items in ending inventory.
Why businesses use FIFO:
It aligns closely with typical business operations; older stock is sold before newer stock.
Because inventory costs usually rise over time (inflation), FIFO often results in:
Lower COGS
Higher gross profit
Higher ending inventory value
Potential drawback:
The higher profit recorded under FIFO may increase taxable income, meaning a greater tax payment for that period.
FIFO Pros | FIFO Cons |
Inventory calculations follow typical selling strategies; the oldest items are sold before newer ones. | Can result in higher reported profit during times when costs are rising. This, in turn, increases the company’s tax burden. |
Often closely matches actual inventory costs because materials prices tend to increase over time. | High reported profits can paint a misleading picture of actual business performance. |
_ | May result in an unrealistically high asset value for ending inventory. |
2. Last in, first out (LIFO).
LIFO assumes that the most recently purchased inventory is sold first. When prices are rising, LIFO increases the cost of goods sold (COGS), which lowers gross profit and reduces income tax for the current period. The higher COGS also results in a lower ending inventory value. While LIFO is allowed under U.S. Generally Accepted Accounting Principles (GAAP), it is not allowed under International Financial Reporting Standards (IFRS).
LIFO Pros | LIFO Cons |
When prices are rising, companies report higher COGS and lower gross profit, which can reduce tax liability during the current period. | Requires complex accounting records and practices because unsold inventory costs remain in the accounting system. |
Closely reflects the real cost of replacing current inventory; matches the most recent costs to the most recent revenue. | May understate inventory value. |
- | Cannot be used in many countries outside the U.S., as it is not accepted under IFRS accounting rules. |
3. Weighted Average Cost (WAC)
This method calculates the cost of goods sold (COGS) and ending inventory by averaging the cost of all inventory items. WAC works best for businesses that sell large quantities of identical products, as it simplifies inventory calculations without tracking individual purchase costs. However, it is less effective for companies with a wide range of products that have significantly different prices or costs.
WAC Pros | WAC Cons |
Simplifies calculations for large volumes of identical goods. | Calculations become more complex as companies sell a broader range of products. |
Smooths out cost fluctuations. | If there are big fluctuations in inventory costs, the company could end up selling some items at a loss. |
Understanding average inventory costs can be helpful when setting prices for new goods in the following accounting period. | Most suitable for companies that sell many identical items; less useful for businesses with widely differing product costs. |
4. Gross Profit Method
The gross profit method estimates ending inventory when it’s not feasible or practical to count every item physically. This method is useful for:
Getting a quick snapshot of inventory between physical counts
Estimating inventory losses due to theft, fire, flood, or other emergencies
Instead of tracking each item, the method relies on the company’s expected gross profit margin to estimate both COGS and ending inventory. Typically, a company uses its historical gross profit margin as a guideline for the current period.
Steps to Calculate Ending Inventory Using the Gross Profit Method:
Estimate COGS: Multiply the net sales for the period by (1 − expected gross profit margin).
Example: If net sales = $50,000 and expected gross profit margin = 40%, then COGS = $50,000 × (1 − 0.40) = $30,000.
Apply the Inventory Formula:
Ending Inventory = Beginning Inventory + Purchases − Estimated COGS |
This gives an approximate value of inventory remaining at the end of the period without needing a full physical count.
Gross Profit Pros | Gross Profit Cons |
A quick way to estimate inventory during an accounting period without a physical count. | Provides only a rough estimate of inventory. |
Can be used to estimate inventory after losses from fire or other disasters. | Not acceptable for audited financial statements. |
5. Retail Method
The retail method is mainly used by retailers to estimate the value of merchandise at a specific point in time. It’s especially helpful for businesses selling large volumes of low-cost items, where counting every item is difficult.
Steps to Calculate Ending Inventory Using the Retail Method:
Estimate COGS: Multiply net sales for the period by the cost-to-retail ratio.
Example: Net sales = $50,000; Cost-to-retail ratio = 80%; Estimated COGS = $50,000 × 0.8 = $40,000
Apply the Inventory Formula:
Ending Inventory = Beginning Inventory + Purchases - Estimated COGS |
Retail Pros | Retail Cons |
Can be used to estimate ending inventory at a specific point within an accounting period without a physical count. | Not accurate enough for a precise measure of ending inventory, especially for stores vulnerable to shrinkage. |
- | Should be supported by more accurate inventory calculations for accounting and tax purposes. |
Example of Ending Inventory
Let’s look at a hypothetical company, 123 Holdings, to understand how ending inventory works.
Beginning Inventory: 100 units at $10 each
Units Sold During the Quarter: 200 units
Purchases During the Quarter: Three additional batches at varying prices
Ending Inventory: 100 units remaining at the end of the period
By calculating the total value of the remaining 100 units using the chosen inventory valuation method (FIFO, LIFO, or Weighted Average Cost), 123 Holdings can determine the ending inventory for financial reporting. This value will impact the company’s cost of goods sold (COGS), gross profit, and overall financial statements.
The next three examples show how the company can calculate its ending inventory value using the FIFO, LIFO and WAC methods. For each example, the same basic formula is used to calculate ending inventory:
Example 1: FIFO (First In, First Out)
COGS calculation (200 units sold):
100 units × $10 = $1,000
50 units × $12 = $600
50 units × $15 = $750
Total COGS = $2,350
Ending Inventory: $3,950 − $2,350 = $1,600
Example 2: LIFO (Last In, First Out)
COGS calculation (200 units sold):
100 units × $16 = $1,600
50 units × $15 = $750
50 units × $12 = $600
Total COGS = $2,950
Ending Inventory: $3,950 − $2,950 = $1,000
Example 3: WAC (Weighted Average Cost)
Weighted Average Cost per Unit: $3,950 ÷ 300 = $13.17
COGS (200 units sold): 200 × $13.17 = $2,633
Ending Inventory: $3,950 − $2,633 = $1,317
Example 4: Gross Profit Method
Data: Beginning Inventory = $500,000, Net Purchases = $250,000, Net Sales = $300,000, Expected Gross Profit Margin = 40%
COGS Estimate: $300,000 × (1 − 0.40) = $180,000
Ending Inventory: $500,000 + $250,000 − $180,000 = $570,000
Example 5: Retail Method
Data: Beginning Inventory = $400,000, Net Purchases = $250,000, Net Sales = $300,000, Cost-to-Retail Ratio = 80%
Estimated COGS: $300,000 × 0.80 = $240,000
Ending Inventory: $400,000 + $250,000 − $240,000 = $410,000
Calculate Ending Inventory With Inventory Management
Calculating ending inventory can be complex as a business grows. Companies often have many items, each with different costs and purchase prices. Tracking this manually with spreadsheets is slow and prone to mistakes. Inventory management systems make this easier. Cloud-based systems can automatically track inventory in real time across all locations. They update as sales happen, ensuring that ending inventory calculations are accurate and current. This helps businesses optimize stock levels, reduce costs, improve cash flow, increase profits, and satisfy customers.
Ending inventory is a key number for any business that sells physical goods. It affects the balance sheet, income statement, and taxes. Choosing the right valuation method is important because it impacts asset value and reported profit. Using inventory management reduces errors and simplifies tracking, giving businesses more control and better insights.
FAQs About Ending Inventory
1. How do you calculate beginning and ending inventory?
Beginning inventory is simply the ending inventory from the previous accounting period. Ending inventory is calculated by adding the period’s purchases to the beginning inventory and then subtracting COGS. Using different inventory valuation methods, such as FIFO, LIFO, or WAC, can affect COGS and result in different ending inventory values.
2. What should be included in ending inventory?
Ending inventory is the value of all sellable goods a business has at the end of an accounting period. It includes the beginning inventory from the start of the period, any purchases made during the period, and subtracts the cost of goods sold (COGS) during the period. This gives a clear picture of the stock that remains available for sale.
3. Where is ending inventory on an income statement?
Ending inventory does not appear as a separate line item on the income statement. However, it plays a crucial role in calculating COGS, which is listed after revenue and is used to determine gross profit. Accurately tracking ending inventory ensures that financial statements reflect the true cost of goods sold and overall profitability.
4. What is the current period’s ending inventory?
The ending inventory for the current period is calculated by taking the beginning inventory, adding any purchases made during the period, and subtracting COGS. This formula shows how much inventory is left at the end of the accounting period and helps businesses plan for future stock needs.
5. Is ending inventory an expense?
Ending inventory is not an expense; it is considered an asset. Only when the inventory is sold does its cost become part of the COGS, which is recorded as an expense on the income statement. This distinction is important for accurately reporting a company’s financial position.
Comments