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
JC Wright

JC has an MBA.

Expert Contributor
Steven Scalia

Steven completed a Graduate Degree is Chartered Accountancy at Concordia University. He has performed as Teacher's Assistant and Assistant Lecturer in University.

This lesson will outline the concept of ending inventory and how it is used in business. Also, we will take a look at a balance sheet and explore the way in which investors use it as tool to gain a high-level view of the status of their companies.

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 $4,500 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: $4,500

Less purchase return: $150

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Additional Activities

Calculating Ending Inventory - A Business Case:

Below is a business case that will allow you to apply your ability to calculate ending inventory.

You are the chief accountant at ABC Parts Ltd, a company that makes bolts used in various industrial processes. The company usually determines its ending inventory by performing an inventory count at the end of every period. On December 31, 2019, the day of the inventory count, there is a gas leak that breaks out in the warehouse. None of the inventory was damaged, however for safety reasons, you or any employees are not allowed in the warehouse. So the annual inventory count will have to be delayed. The company is in a hurry to produce financial statements and needs some preliminary numbers. Inventory is an important number because management is always worried about having too much on hand, or too little. You therefore turn to your computer at pull up some financial information that can be used to compute ending inventory. Here are the numbers that you found:

ItemBalance ($)
Inventory balance at December 31, 2018120,350
Inventory balance at December 31, 2019unknown
Purchases made during the year40,000
Purchase returns2,160
Cost of goods sold65,015


Compute ending inventory at December 31, 2019.


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

=120,350 + (40,000 - 2,160) - 65,015


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