Ending Inventory

What Is Ending Inventory?

Ending inventory is the value of goods still ready to move and held by a company toward the finish of a accounting period. The dollar amount of ending inventory can be calculated utilizing various valuation methods. Albeit the physical number of units in ending inventory is a similar under a method, the dollar value of ending inventory is impacted by the inventory valuation method picked by management.

Figuring out Ending Inventory

At its generally fundamental level, ending inventory can be calculated by adding new purchases to beginning inventory, then deducting the cost of goods sold (COGS). A physical count of inventory can lead to more accurate ending inventory. Be that as it may, for larger businesses, this is frequently eccentric. Progressions in inventory management software, [RFID systems](/radio-recurrence recognizable proof rfid), and different advancements utilizing associated gadgets and platforms can facilitate the inventory count challenge.

Ending inventory is an outstanding asset on the balance sheet. It is essential to report ending inventory accurately, especially while getting financing. Financial institutions regularly expect that specific financial ratios, for example, debt-to-assets or debt-to-profit ratios be kept up with by the date of evaluated financials as part of a debt covenant. For inventory-rich businesses like retail and manufacturing, inspected financial statements are closely checked by investors and creditors.

Inventory may likewise should be written down in light of multiple factors including theft, market value diminishes, and general obsolescence as well as computing ending inventory under run of the mill business conditions. Inventory market value might diminish in the event that there is a large dip in consumer demand for the product. Likewise, obsolescence might happen if a fresher rendition of a similar product is delivered while there are still things of the current form in inventory. This type of situation would be most common in the steadily changing technology industry.

Auditors may expect that companies check the real amount of inventory they have in stock. Doing a count of physical inventory toward the finish of an accounting period is likewise an advantage, as it assists companies with determining what is close by compared to what's recorded by their computer systems. Any disparity between a company's genuine ending inventory versus what's listed in its automated system might be due to shrinkage — a loss of inventory for quite a few reasons including theft, vendor or accounting errors, issues with delivery, or some other related issue.

Special Considerations

The term ending inventory includes three unique types of materials. Raw materials are those utilized in the primary production cycle or materials that are ready to manufactured into completed goods. The second, called work-in-process, alludes to materials that are currently being changed over into definite goods. The last category is alluded to as completed goods. These goods have gone through the production interaction and are ready to be sold to consumers.

The inventory valuation method picked by management impacts numerous well known financial statement metrics. Inventory-related income statement things incorporate the cost of goods sold, gross profit, and net income. Current assets, working capital, total assets, and equity come from the balance sheet. These things are important parts of financial ratios used to evaluate the financial wellbeing and performance of a business.

Last In, First Out (LIFO)

Last in, first out (LIFO) is one of three common methods of distributing cost to ending inventory and cost of goods sold (COGS). It assumes that the latest things purchased by the company were utilized in the production of the goods that were sold earliest in the accounting period. At the end of the day, it assumes the last things requested are sold first. Under LIFO, the cost of the latest things purchased are allocated first to COGS, while the cost of more established purchases are allocated to ending inventory — which is still available toward the finish of the period.

Earliest in, earliest out (FIFO)

First in, first out (FIFO) assumes that the most established things purchased by the company were utilized in the production of the goods that were sold earliest. Basically, this method assumes the principal things requested are sold first. Under FIFO, the cost of the most seasoned things purchased are allocated first to COGS, while the cost of later purchases are allocated to ending inventory — which is still available toward the finish of the period.

During a period of rising prices or inflationary tensions, FIFO (earliest in, earliest out) creates a higher ending inventory valuation than LIFO (last in, first out).

Weighted-Average Cost (WAC)

The weighted average cost method assigns a cost to ending inventory and COGS in light of the total cost of goods purchased or created in a period separated by the total number of things purchased or delivered. It "loads" the average since it thinks about the number of things purchased at each price point.

Instances of Calculating Ending Inventory

To feature the differences, we should investigate a similar situation with ABC Company utilizing every one of the three valuation methods from a higher place. ABC Company made different purchases all through the long stretch of August that additional to its inventory, and at last its cost of goods sold. This is the company's inventory ledger:

The next step is to assign one of the three valuation methods to the things in COGS and ending inventory. We should assume the 200 things in beginning inventory, starting around 7/31, were undeniably purchased beforehand for $20.

• Utilizing LIFO, the 700 things sold would have been assigned the accompanying cost: ((200 units x $25) + (100 units x $24) + (400 units x $20)) = $15,400 COGS. The things in ending inventory would have been assigned the accompanying cost: (300 units x $20) = $6,000 ending inventory.
• Utilizing FIFO, the 700 things sold would have been assigned the accompanying cost: ((200 units purchased already x $20) + (500 units x $20) = $14,000 COGS. The things in ending inventory would have been assigned the accompanying cost: ((100 units x $24) + (200 units x $25)) = $7,400 ending inventory.
• Utilizing the weighted average cost method, each unit is assigned a similar cost, the weighted average cost (WAC) per unit. To ascertain the WAC per unit, we take the $21,400 total cost of all purchases and separation by the 1,000 total things (800 from current period purchases plus 200 from prior inventory). The WAC per unit is $21.40, so the COGS would be assigned a value of $14,980 (700 x $21.40) and ending inventory would be assigned $6,420 (300 x $21.40).

In every one of these valuation methods, the sum of COGS and ending inventory continues as before. In any case, the portion of the total value allocated to every category changes in view of the method picked. A higher COGS leads to a lower net profit. Hence, the method decided to value inventory and COGS will straightforwardly impact profit on the income statement as well as common financial ratios derived from the balance sheet.

Features

• The method decided to assign a dollar value to inventory and COGS impacts values on both the income statement and balance sheet.
• There are three common valuation methods for inventory: FIFO (earliest in, earliest out), LIFO (last in, first out), and weighted-average cost.
• Ending inventory is an important part in the calculation of cost of goods sold.