What is Ending Inventory?

Inventory management is a crucial part of any business dealing with the storage of products for future selling. One critical element of inventory management is ending inventory, also known as closing inventory. This metric can have a massive impact on your balance sheets, taxes, and other financial processes, making it essential to understand the ins and outs of ending inventory.

But what is ending inventory, how can you calculate this metric, and why is it so important for businesses to understand? This article will cover everything about ending inventory so your business can thrive!

What is Ending Inventory?

Before determining how to find desired ending inventory, let’s ask the big question: what is ending inventory, and what does it mean for your company? Ending inventory is the total value of an organization’s goods available for sale at the end of any accounting period. Ending inventory is recorded on your balance sheet so stakeholders and investors can better understand your financial performance.

Ending inventory is also called your closing inventory and allows companies to determine their net income. It contributes to core financial processes and involves three types of inventory: raw materials, work-in-process, and finished goods.

• Raw materials are used in the production of stock or materials prepared to be manufactured into finished goods.
• Work-in-process materials are materials that are being converted into final stock.
• Finished goods are materials that have finished production and can be sold to customers.

Why Ending Inventory is Important

Understanding your average ending inventory is crucial for several reasons, and without a proper understanding of how to find ending inventory, your organization might struggle with financial processes. Below are some of the core reasons why ending inventory matters.

Ending Inventory is Used to Obtain Financing

One reason ending inventory is so essential is that this metric is used for obtaining investor financing. Lenders need proof of your company’s success before they feel comfortable financing your business, and a healthy ending inventory amount can prove that you have successful sales and are profitable – making investors more likely to provide funds.

Ending Inventory Helps With Inventory Counting

Maintaining an accurate inventory count is vital to understanding your company’s sales and performance. Ending inventory provides an accurate reflection of inventory counting that you need to understand your sales, determine the amount of stock necessary to meet demand, and prevent overstocking or understocking.

An accurate inventory count is also crucial to monitor and prevent inventory shrinkage, which can cause financial difficulties and stocking issues if not addressed promptly. By revealing the presence of inventory shrinkage, ending inventory can help determine whether your business is struggling with damage, theft, spoilage, or record-keeping mistakes.

Ending Inventory is Used to Calculate Net Income

One of the most important financial measures you need to understand is your company’s net income, and ending inventory plays a crucial role in determining this metric. Understanding your ending inventory informs you whether you’re generating less money in sales than you’re storing in your inventory. You can compare your ending inventory to your net income to determine if you’re overpaying for your inventory, over or underpricing stock, and profiting from your current inventory processes.

How to Calculate Ending Inventory

Knowing how to find ending inventory requires understanding the cost of ending inventory formula. This metric can be calculated with the ending inventory formula: Beginning inventory + net purchases - cost of goods sold = ending inventory.

• Your beginning inventory is the total value of your inventory at the beginning of an accounting period. This value is the same as the ending inventory value from your previous accounting period.
• Your net purchases are the total cost of goods you’ve purchased and added to your inventory during an accounting period.
• Your cost of goods sold (COGS) is the total cost of manufacturing or purchasing goods sold during the accounting period.

For instance, if you have a beginning inventory of $15,000 and have invested $10,000 in new products, you’d start with $25,000 worth of inventory. Once you get this number, you can subtract the cost of goods sold – in this example, $18,000 – to get an ending inventory of $7,000.

Ending Inventory Methods

There are several methods that companies use to calculate ending inventory. These methods use the same basic formula mentioned above but provide a different understanding of your inventory valuation. The three main methods used for ending inventory are weighted average cost (WAC), last in, first out (LIFO), and first in, first out (FIFO). Below is a breakdown of these methods.

Weighted Average Cost

The WAC is the average value of a company’s inventory and is typically used when a company stocks the same items. This method assigns a total cost to your ending inventory and the COGS. It is determined by considering the total cost of goods produced or purchased in an accounting period. This number is divided by the total amount of inventory purchased or produced in that period.

Last In, First Out

The LIFO method assumes that your newest inventory products are sold or used first. With this method, the cost of your most recently purchased items is allocated to the COGS, while the cost of older inventory items is allocated to the ending inventory.

First In, First Out

The FIFO method assumes that the inventory you purchase first is also sold first. With this method, the cost of your oldest inventory products is allocated to the COGS, while the cost of recent purchases is allocated to your ending inventory.

Solutions for Your Ending Inventory

Inventory management is crucial to any successful business. From preventing stockouts to understanding your net income, there’s no denying the importance of ending inventory. While knowing how to calculate ending inventory is vital, knowing how to count your inventory is equally important. Zupan provides essential inventory counting software to simplify your business and streamline inventory management.

Our inventory counting solution eliminates the need for manual counting for faster, more accurate inventory management processes that help your business thrive. Learn more about Zupan today and see how we help businesses succeed!