Ending Inventory: How to Calculate the Value of Inventory at Year-End

Ending inventory is the total value of goods you have available for sale at the end of an accounting period, like the end of your fiscal year. It’s an inventory accounting method that helps retailers benchmark net income, obtain financing, and run accurate stock checks.

Knowing your ending inventory value will impact your balance sheets and taxes. Before filing your income taxes, it’s important to calculate the total value of your inventory for that year correctly.

This guide shares how to do it, with examples and tips to help you control inventory more accurately (and less stressfully).

What is ending inventory?

Ending inventory is the total dollar value of the inventory you have left to sell at the end of an accounting period. You’ll often see it listed on financial statements, including your balance sheet, at the end of an accounting year.

In simple terms: If you start the month with $500 worth of items and sell $300 worth of stock, your ending inventory would be $200.

Why do you need to calculate ending inventory?

Your ending inventory balance isn’t just a metric to keep an eye on at year end. It’s an inventory valuation method to consider throughout the year. Here’s why. 

Accurate inventory count

Retail inventory management is a pain point for brick-and-mortar retailers. From ordering too much stock to turning customers away with stockouts, knowing your inventory helps with accurate stock taking.

Compare your ending inventory with your physical counts. Too much difference between the two means you’re dealing with inventory shrinkage—stock going AWOL. (For 15% of retailers, inventory shrink is more than 3%, costing them $61 billion annually.) 

Completing a full physical inventory count is the best way to calculate your ending inventory and start the new year on the right foot. While counting every product in the store seems tedious, it ensures the products on your shelves match what’s in your books. It also means getting eyes on inventory hiding in the corner of your backstore and discovering operational trends, such as receiving errors.

If the ending inventory for your homeware line is $5,000 but you only counted $4,650 worth of goods in your stockroom, for example, it’s time to investigate. Employee theft, return fraud, or shoplifting could be the issue.

Without an accurate inventory count, ending inventory is impossible to calculate, and manually keeping track of inventory can be tedious and difficult. I always recommend that businesses invest in inventory management software that can automate the monitoring process—among other things—and give the most accurate data possible.

Accurate inventory counting helps plan your open-to-buy budget, too. There’s not much sense in investing $10,000 into stock replenishment if you have $7,500 worth of unsold inventory. Avoid relying on intuition and ordering excess safety stock if sellable products are lingering in your stockroom. 

Calculate net income

Net income is one of the most important financial metrics for retailers to consider. It’s the money left in your bank account after paying for expenses—such as staff salaries, tax, and production costs—over a given period, usually shown on an income statement. 

Benchmark your ending inventory value against your net income to see whether you’re overpaying for goods or underpricing stock.

If your ending inventory is $25,000 but your net income is just $20,000, you’re holding more money in inventory than you’ve generated in sales. Overpaying for stock could be the issue. Consider bartering with suppliers or increasing product prices for a healthier net income–to–ending inventory ratio.  

These calculations can help businesses properly forecast their inventory needs and proactively engage with suppliers, which are both hugely important to the profitability of any brick-and-mortar.

Inform future reports

Once year end passes, the ending inventory recorded on your balance sheet acts as the beginning inventory for the following year. Get your calculations wrong, or use a combination of methods (more on that later), and you’re setting yourself up for problems down the road.

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Let’s put that into perspective and say your ending inventory for 2021 was valued at $50,000. Going into the following year, that figure would be listed as your starting inventory. Once 2022 ends, you’ll use it to calculate your ending inventory for that financial year. That’s much easier to do if the ending inventory for the year prior was accurate.

Obtain financing

Loans exist to help retailers survive tough financial periods. They’re available so you don’t join the 82% of small businesses who shut up shop because of poor cash-flow management. 

Whether you’re looking for extra cash to buy more physical inventory items or take on new retail associates, lenders will want to see your financial statements before giving away money. 

From opening a second retail location to manufacturing your own product line, lenders need an accurate portrayal of your business. Accurate inventory valuation, stock counts, and sales records are key. Not only will proper inventory management ease financial obstacles, it will help you implement a successful expansion plan with insights into profitability and demand volume.

Ending inventory is one metric they’re looking at, because it’s considered an asset. Lenders may be more willing to give your business funding—on more favorable terms—if the business has a low debt-to-asset ratio.

How to calculate ending inventory

Knowing your ending inventory gives you greater control over stock-related and financial decisions. So, how do you calculate it? Below are six methods to choose from.

Bear in mind that whichever method you choose, you’ll need to stick with it. Financial reports become inaccurate—and the chance for mistakes become higher—if you’re switching between multiple ending inventory formulas.

Ending inventory formula

The simplest way to calculate ending inventory is using this formula:

Beginning inventory + new purchases – cost of goods sold (COGS) = ending inventory

For example, if your beginning inventory was worth $10,000 and you’ve invested $5,000 in new products, you’d be sitting on $15,000 worth of inventory. Minus the $12,000 worth of products you’ve sold through the same period, ending inventory would be $3,000. 

FIFO method

Other retailers prefer to calculate ending inventory using the first-in, first-out (FIFO) method. It assumes that the products you bought first were sold first, and is used by accountants throughout periods of economic uncertainty.

Let’s put it into practice and say you’re calculating the ending inventory for your retail store. You bought 150 candles at $7. Mid-way through the year, a supplier increased their prices. You bought another 150 candles at their new $9 price point. That’s 300 candles purchased at a total cost of $2,400.

Your order management system shows 130 candle sales at the end of the accounting period. You bought the $7 candles first, so COGS would be calculated as $7 x 130 = $910.

You’d then use the FIFO method to calculate ending inventory: Beginning inventory ($5,000) + new purchases ($2,400) – COGS ($910) = $6,490 ending inventory.

LIFO method

The last -in, first out (LIFO) method is another common way to calculate ending inventory. It assumes that products purchased most recently are the first items to be sold.

Using the same example as above, COGS would be calculated with the new $9 candle supplier price point (since those candles were ordered most recently). Selling 130 candles would mean your COGS equals $1,170.

That would make the ending inventory formula: Beginning inventory ($5,000) + new purchases ($2,400) – COGS ($1,170) = $6,230 ending inventory.

Weighted average cost method 

The weighted average cost (WAC) method is the middle ground between FIFO and LIFO. It gives an average of how much each stock keeping unit (SKU) is worth by dividing the total cost by the volume of inventory you have in your stockroom. 

Sticking with the same example: $2,400 / 300 = average cost of $8 per candle. When we multiply this by 130 candle sales throughout the year, the COGS would total $1,040.

Here’s what that would look like: Beginning inventory ($5,000) + new purchases ($2,400) – COGS ($1,040) = $6,360 ending inventory.

Gross profit method

Gross profit, also known as gross margin, is the percentage of profit you’ll make on each product after subtracting the cost to produce it. Use this figure to calculate ending inventory using the following formula: 

1. Beginning inventory + COGS = total cost of goods available for sale 
2. Gross profit x sales = estimated cost of goods sold
3. Total cost of goods available for sale – cost of goods sold = ending inventory

Retail method

Designed for stores that do physical stock checks, you’ll need a few metrics on hand before using the retail method to calculate ending inventory:

• Cost-to-retail ratio: Cost / retail price x 100
• Cost of goods available for sale: Beginning inventory + cost of goods
• Cost of sales: Sales x cost-to-retail ratio

From there, calculate ending inventory with this formula: Cost of goods available for sale – cost of sales = ending inventory.

Find your ending inventory

Knowing how much cash is tied up in inventory helps you make smarter business decisions—from accurate stock-taking reports to sensible open-to-buy budgets. 

Just remember that whichever formula you use is the one that’ll see you throughout your store’s lifetime. Accurate and clear financial reports make your life easier down the road. 

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