Ending Inventory

At its most basic level, ending inventory can be calculated by adding new purchases to beginning inventory, then subtracting costs of goods sold.

This makes ending inventory the value of goods available for sale at the end of an accounting period. Although the number of units in ending inventory won’t be affected at the end of an accounting period, the dollar value of ending inventory is affected by the inventory valuation method chosen by management.

During a period of rising prices or inflationary pressures, FIFO (first in, first out) generates a higher ending inventory valuation than LIFO (last in, first out). As such, certain businesses strategically select LIFO or FIFO methods based on different business environments.

A physical count of inventory can lead to more accurate inventory valuation. But for larger businesses, this is often unpractical. Advancements in inventory management software, RFID systems, and other technologies leveraging connected devices and platforms can ease the valuation challenge.

Other issues include:

• Writing down inventory levels for theft, market value decreases, and general obsolescence.
• Ending inventory is a popular balance sheet item, which is essential when obtaining financing. For inventory rich businesses such as retail and manufacturing, accurate audited financial statements are closely monitored by investors and creditors.
• Accurate inventory valuations impact many popular financial statement metrics. Income statement items include the cost of goods sold, gross profit, and net income. Current assets, working capital, total assets, and equity come from the balance sheet.

All items are important to assessing the financial health and performance of a business.