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Calculate Ending Inventory: Formula & Explanation

Instructor: 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

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