Calculate Ending Inventory: Formula & Explanation

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  • 0:01 Ending Inventory
  • 0:42 What Is a Balance Sheet?
  • 1:37 Ending Inventory Calculation
  • 3:21 Sarah's Data
  • 3:47 Lesson Summary
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Lesson Transcript
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 Defined

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 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 knows in order to successfully report ending inventory, she'll need to look at the previous balance sheet for ACME Lumber Yard.

What Is a Balance Sheet?

But what exactly is a balance sheet? A balance sheet is a summary of a 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 (or items owned by the company) and liabilities (or items that are in accounts payable status). Here are a few examples of assets and liabilities:

Assets (on the positive side of the balance sheet)

  • Inventory
  • Cash
  • Office equipment
  • Computers
  • Company vehicle

Liabilities (on the 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 within a specified accounting period.

Ending Inventory Calculation

Sarah recalls that calculating ending inventory is pretty straightforward but can be tricky if you are not careful. There are other components that make up this simple equation.

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

Beginning inventory is 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 are 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 within 10 days (2/10):

Gross Purchase: $4500

Less purchase return: $150

Less purchase discount: $90

Net Purchase: $4260

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