Ending inventory is a key requirement when a business is closing its books. It is needed to derive the cost of goods sold, which in turn is needed to calculate profits. Thus, without an accurate ending inventory figure, it is impossible to determine a firm’s profitability. To calculate ending inventory, add all purchases during the period to beginning inventory, and then subtract the cost of goods sold. The calculation is:

Beginning inventory + Purchases - Cost of goods sold = Ending inventory

Example of the Ending Inventory Calculation

A business has $100,000 of beginning inventory, purchases an additional $250,000 of inventory during the month, and sells off $300,000 of it during the month, leaving $50,000 of ending inventory. The calculation is:

$100,000 beginning inventory + $250,000 purchases - $300,000 cost of goods sold
= $50,000 ending inventory

Lower of Cost or Market Rule

The value of this ending inventory is based on the lower of cost or market rule, which states that the inventory must be valued at the acquisition cost of the inventory or its market value less selling costs, whichever is lower.

Related AccountingTools Course

Accounting for Inventory

Inventory Valuation Methods

The valuation assigned to the ending inventory will depend on the cost layering method employed. Under the first in, first (FIFO) method, the accounting system assumes that the inventory items entering the system first are the first ones to be used, so the costs assigned to the earliest units are charged to the cost of goods sold. Under the last in, first out (LIFO) method, the system assumes that the inventory items entering the system last are the first ones to be used, so the costs assigned to the latest units are charged to the cost of goods sold. There are several other costing methods that may be used, such as the specific identification method and the weighted-average method.