What is Ending Inventory?

Ending inventory is the amount of inventory remaining on the premises at the end of a reporting period. It is a key requirement when a business is closing its books, because 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.

How to Calculate Ending Inventory

To calculate ending inventory, summarize the cost of all purchases during the period, add this amount to beginning inventory, and then subtract the cost of goods sold. The calculation is as follows:

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 lower of cost or market (LCM) rule is an accounting principle that requires inventory to be recorded at the lower of its historical cost (the original purchase price) or its market value (current replacement cost). This rule ensures that inventory is not overstated on financial statements, reflecting any potential declines in value due to factors like obsolescence, damage, or market price drops. Market value is typically limited to a range between net realizable value (NRV)—the estimated selling price minus costs to sell—and NRV minus a normal profit margin. The LCM rule follows the conservatism principle in accounting, preventing companies from overstating assets and ensuring financial statements provide a realistic view of a company’s financial position.

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.