Ending Inventory Formula: Definition
Ending inventory refers to the value of the goods that a business or a company holds at the end of the accounting period. The ending inventory formula is the key to calculating the value of the goods that the company can sell in the next accounting year.
Significance of Ending Inventory Formula in an E-commerce Business
Calculating ending inventory is an essential part of an accounting period in e-commerce business. The significance of the calculation of ending inventory is listed as follows:
- Companies understand their financial position
- It derives the Cost of Good Sold (COGS) value
- Calculating the cost of ending inventory formula helps a business maintain an accurate balance sheet and creates consistent financial reports of a company
- It impacts the net income of a company. Overstating or understanding the ending inventory of a company disrupts the accuracy of the company’s net income
Applications of the Ending Inventory Formula
Ending Inventory formula gives companies an idea of how much inventory they are selling. Some general applications of the ending inventory formula are as follows:
- It helps companies ascertain the number of net purchases they must make in the next accounting year
- It also helps to run accurate stock checks so that no stock is left idle
Ending Inventory Formula
Ending inventory = Beginning Inventory + Net Purchases – Cost of Good Sold (COGS)
Definition of Each Element in the Ending Inventory Formula
Beginning inventory – Goods’ value at the beginning of the accounting period that companies can sell in the market.
Net purchases – Cost of the goods a company has purchased throughout the accounting year that can be made available for sale in the market.
Cost of goods sold (COGS) – Cost of manufacturing or purchasing finished goods that can be sold in the market.
How To Use Ending Inventory Formula To Calculate Business’ Turnover Ratio?
Consider an inventory manager who is responsible for calculating ending inventory with the help of the cost of ending inventory formula. To calculate the ending inventory an inventory manager has to access a company’s balance sheet.
A part of the balance sheet is stated as follows:
Beginning inventory: ฿ 2,00,000
Purchases made: ฿ 60,000
Purchases returned: ฿ 20,000
COGS: ฿ 1,00,000
For calculating the ending inventory, apply the above-mentioned formula:
Ending inventory= ฿ 1,40,000
What Can You Infer From The Result Of The Ending Inventory Formula?
A business can calculate the amount of beginning inventory they have in hand for the next accounting year.