Calculate Ending Inventory Formula and Explanation – ending inventory | formula | explanation
Calculate Ending Inventory Formula and Explanation
Inventory items are assets owned by a company (products, raw materials, & parts) for the purpose of selling. At the end of an accounting period, businesses calculate ending inventory to determine the financial status of the company. Learn how to define ending inventory, explain the purpose of balance sheets, and how to use a formula to calculate ending inventory.
Ending Inventory Defined
Mary, a recent MBA graduate, just received her first real job 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, Mary knows that 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?
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 its 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
Less purchase discount: $90
Net Purchase: $4,260
COGS – This amount is the cost related to the purchase or production of a product. This is known as a direct cost and can include the cost of raw materials, supplies for production, packaging cost, etc. Some companies also include indirect costs, such as the depreciation of equipment, labor costs, and salaries of project supervisors.
Mary’s Data
Mary reviews the inventory log, salary compensations, receipts for equipment, and various company records in order to obtain all of the information that is needed to calculate ending inventory:
Beginning inventory – $20,000
Net purchases – $10,000
COGS – $12,000
$20,000 + $10,000 – $12,000 = $18,000 (ending inventory)
Inventory items are the assets owned by a company and intended to be resold or are raw materials and parts that are purchased to be used in producing goods and products that are resold. Ending inventory, the value of goods available for sale at the end of the accounting period plays an important role in reporting the financial status of a company and can best be figured out using the equation, Beginning Inventory + Net Purchases – Cost of Goods Sold (or COGS) = Ending Inventory. The balance sheet is a summary of a company’s assets, liabilities, and shareholders’ equity for a given accounting period. Assets are items owned by the company and liabilities are items that are in the accounts-payable status.
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