Calculate Ending Inventory: Formula, Lesson & Quiz

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Taught by

JC Wright

This lesson will outline the concept of 'Ending Inventory' and how it is used in business. Also, we will also take a look at a balance sheet and how investors use it as tool to gain high-level view of the status of their company.

Ending Inventory

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Sarah, a recent MBA graduate, just received her first real job since graduating from business school. She got a job at a manufacturing company called ACME Lumber Yard where they sell timber (Birch to be specific) to various real estate development firms. Her first assignment is to calculate the ending inventory for all the lumber that is in stock. Ending inventory is the value of goods available for sale at the end of the accounting period.

Being a very eager and productive member of the workforce, Sarah quickly recalls where her research will begin in order to successfully report ending inventory…the previous balance sheet for ACME Lumber Yard!

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What is a Balance Sheet?

A balance sheet is a summary of a company company's assets, liabilities and shareholders' equity for a given accounting period. The owners (also known as the investors) use the data as a measure of how the company stands in regards to current assets (items owned by the company) and liabilities (items that are in an accounts payable status). Here are a few examples of assets and liabilities:

Assets (positive side of the balance sheet)

  • Inventory
  • Cash
  • Office Equipment
  • Computers
  • Company Vehicle

Liabilities (negative side of the balance sheet)

  • Notes Payable
  • Accounts Payable
  • Taxes
  • Unearned Revenue

This is where the term BALANCE sheet is derived. These transactions account for all of the pluses and minuses that occur with a specified accounting period.

Ending Inventory Calculation

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As she recalls, calculating ending inventory is pretty straight forward, but can be tricky if not careful. There are other components that make up this simple equation.

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

  • Beginning Inventory - Monetary values that a company assigns to their current inventory.
    • This total will equal the ending inventory of the previous accounting period. Beginning inventory is found on the balance sheet.
  • Net Purchases - New inventory that was purchased during the current accounting period. A company will need to maintain accurate bookkeeping to maintain records of purchases obtained.
    • This is the gross purchase amount minus any discounts, returns and allowance.
      • For example, let's say for the previous accounting period ACME made a purchase for $4500 on terms of 2/10 net 30 and there is a return of $150. This means the full amount has to be paid within 30 days (net 30) but ACME has the option take a 2% discount if the full amount is paid with 10 days (2/10):
        • Gross Purchase: $4500
        • Less purchase return: $150
        • Less purchase discount: $90
        • Net Purchase: $4260
  • COGS - This amount is the cost related to the purchase or production of a product. This is known as direct cost and can include cost of raw materials, supplies for productions packaging cost, etc… Some companies also include indirect costs such as depreciation of equipment, labor costs, and salaries of project supervisors.

Sarah's Data

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Sarah reviews the inventory log, salary compensations, receipts for equipment and various company records in order to obtain all of the information that is needed to calculate ending inventory:

Beginning Inventory

  • $20,000

Net purchases

  • $10,000

COGS

  • 12,000
    • $20,000 + $10,000 - $12,000 = $18,000 (Ending Inventory).

Conclusion

Inventory items are the assets owned by a company and intended to be resold or are raw materials and parts that are purchased to be used in producing goods and products that are resold. Ending inventory, the value of goods available for sale at the end of the accounting period, plays an important role in reporting the financial status of a company.

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