We have created this calculator to make it easy to evaluate inventory units when accounting periods expire. With this easy-to-use tool, you can compute the value of your ending inventory with ease. It will assist you in calculating inventory turnover too. That will help you gauge the efficiency of selling different products.
This article covers everything you need to know about ending inventory. You will learn how to calculate it using the ending inventory formula and much more. Aside from the ending inventory calculations, we will see what inventory turnover means and how it is calculated. Read on to learn more!
Ending Inventory – What Is It?
The first step to managing inventory is to understand what it is. Inventory is the amount of goods available for sale at a particular time. The amount of inventory on hand at a store or warehouse is called stock, and the term stock refers to all the items that are in storage.
The second step to managing inventory involves understanding why it’s important to manage it. Inventory management can help companies fulfill customer orders more quickly and efficiently, while also reducing costs. Keep reading to find out more!
Ending Inventory Explained
After selling products, some items will likely be unsold when the accounting period runs out. These products are kept in stock. They still have value despite remaining unsold. This is known as the ending inventory in trade.
The ending inventory is the inventory that is left over at the end of a period. It is the amount of goods that a company has in stock at the end of a fiscal year. By conducting a physical count, you can easily determine the ending inventory value. It isn’t always feasible, though. By the way, it takes a lot of effort and time. If you are not capable of performing an actual count, conduct the analytical one.
There are different methods for calculating the ending inventory. It’s usually calculated by taking the total cost of all goods and subtracting it from the total revenue generated from those same goods. The difference between these two numbers is what constitutes the ending inventory. Likewise, it can be calculated by taking the beginning inventory and adding to it all purchases minus all sales.
What Are the Reasons for an Ending Inventory?
We will explain how the ending inventory can be calculated in the section below. At this stage, it is important to note that the ending inventory is a situation where a company has too much stock on hand. The main reasons for an ending inventory are:
- The company overestimated the demand for the goods it produces.
- The firm underestimated the production costs and, as a result, produced more goods than it could sell.
- There was a problem with production that caused delays in delivering orders to customers.
- The company overestimated the demand for its goods and had to produce more to meet that demand.
How to Calculate Ending Inventory?
Are you wondering what the ending inventory formula looks like? Take a look below!
Ending Inventory = Beginning Inventory + Net Purchases – Cost of Goods Sold
As you can see, there are three components of this formula only: beginning inventory, net purchases, and cost of goods sold. Let’s see what they stand for.
- Beginning inventory: As the name suggests, it’s the inventory value that is computed when the accounting period starts off. This means you will have to evaluate the beginning inventory when calculating the ending inventory. Be sure to take into account every product and item.
- Net purchases: It refers to the worth of new inventory items, providing that they were bought in the course of the accounting period. Net purchases are the total of all purchases made by consumers, minus any returns or refunds. This is what retailers and e-commerce companies need to make in order to stay in business.
- Cost of goods sold (COGS): COGS are the costs of goods sold by a company, which is the cost of the inventory sold during a given period. The cost of goods sold is an important metric for companies that sell products or services to calculate their gross profit margins and to understand how much they have spent on acquiring inventory. It’s the direct production cost of goods or products that are sold out of the inventory materials.
Now that you have a good understanding of the ending inventory formula and its components, we will provide an example to help you understand how it works in practice.
- Beginning Inventory: $10,000
- Net Purchases: $1,000
- Cost of Good Sales: $2,000
For these values, the ending inventory calculation will be as follows:
Ending Inventory = Beginning Inventory + Net Purchases – Cost of Goods Sold
Ending Inventory = 10,000 + 1,000 – 2,000
Ending Inventory = $9,000
So, in our example, the ending inventory is $9,000. It is quite easy to calculate. Nevertheless, we recommend using our calculator. It is worth using!
What Is Inventory Turnover?
Inventory turnover is a measure of the efficiency of a company’s inventory. It is one of the most important metrics for any retailer. This measure helps the company know how many times its products are sold in a specific period of time. There are three different types of inventories:
- Raw materials and supplies inventory
- Work in progress inventory, and
- Finished goods inventory
The first two types are related to the production process, while finished goods inventory is related to the selling and distribution process.
How to Calculate Inventory Turnover?
Inventory turnover tells us how efficient the company is in selling its products. This indicator shows how quickly the company’s inventory turns over. To calculate this value, you need to use the formula below:
Inventory Turnover = COGS / [(Beginning Inventory + Ending Inventory)/2]
Keep in mind that no value (neither low nor high) of inventory turnover is optimal. While most businesses prefer high inventory turnover values, it’s not always a good option. Sometimes higher values are indicators of low inventory levels. This may cause the company to have trouble delivering products to its buyers.