Ending Inventory Explained: Definition, Formula, Examples

Ever looked at your shelves and felt unsure about how much inventory you really have left?

Maybe your reports say one thing, but the reality in your warehouse tells another story. Without an accurate count, you risk overspending on new stock, miscalculating profits, or running into stockouts at the worst possible time.

Understanding ending inventory helps you avoid these situations by showing exactly what remains in your business at the close of each accounting period.

What is Ending Inventory?

Ending inventory refers to the total value of products or materials a business still has on hand at the end of a specific accounting period.

It includes items that are ready for sale, as well as raw materials and work-in-progress goods if you’re a manufacturer.

In simple terms, it’s the leftover stock that hasn’t been sold or used up by the time your books close for the month, quarter, or year.

Because it directly affects your cost of goods sold (COGS), gross profit, and overall financial health, ending inventory is treated as a current asset on your balance sheet.

For example, if you start the month with 1,000 units, purchase another 500 during the period, and sell 1,200, your remaining 300 units become your ending inventory.

This figure not only shows how much stock you still own but also becomes the starting point — or beginning inventory — for your next accounting period.

By keeping an accurate count and value of ending inventory, businesses can avoid stock discrepancies, make better purchasing decisions, and maintain accurate financial reporting.

How to Calculate Ending Inventory

Ending inventory can be calculated using a simple formula that factors in your beginning inventory, purchases, and cost of goods sold (COGS).

This approach helps ensure that the value you report at the end of an accounting period is accurate.

Formula

Ending Inventory=Beginning Inventory+Net Purchases−Cost of Goods Sold (COGS)

• Beginning Inventory: The value of your inventory at the start of the period.
• Net Purchases: All additional inventory you’ve bought (including shipping and handling) minus returns or discounts.
• COGS: The total cost of products sold during the period.

Example:

If you start the quarter with $10,000 in inventory, purchase $5,000 worth of new products, and your COGS is $9,000, the calculation would be:

Ending Inventory=$10,000+$5,000−$9,000=$6,000

This means you have $6,000 worth of inventory left at the end of the period.

Accurately calculating this figure is essential, as it feeds directly into your financial statements and future purchasing decisions.

Ending Inventory Methods and Examples

There are several ways to value your ending inventory.

Each method can result in different inventory values and cost of goods sold (COGS), so the method you choose can impact your financial statements and taxes.

FIFO (First-In, First-Out)

FIFO assumes that the oldest inventory items are sold first, leaving the newest (and usually higher-cost) items in ending inventory.

Example

You buy 100 units at $5 each and later buy another 100 units at $7 each. If you sell 120 units, FIFO assumes the first 100 units sold cost $5 and the next 20 cost $7.

Ending Inventory: 80 units × $7 = $560

LIFO (Last-In, First-Out)

LIFO assumes that the most recently purchased items are sold first, leaving the oldest (and usually lower-cost) items in ending inventory.

Example

Using the same numbers: 100 units at $5 and 100 units at $7. Selling 120 units means the last 100 units sold cost $7 and the remaining 20 cost $5.

Ending Inventory: 80 units × $5 = $400

Weighted Average

This method averages the cost of all items available for sale during the period and applies that average cost to both COGS and ending inventory.

Example

Total cost of 200 units = (100 × $5) + (100 × $7) = $1,200.

Average cost per unit = $1,200 ÷ 200 = $6.

Ending Inventory: 80 units × $6 = $480

Specific Identification

This method assigns the actual cost of each specific item to COGS or ending inventory. It’s usually used for high-value or unique items.

Example

You sell specific items that cost $5, $6, and $7 each. You track exactly which items were sold and which remain in inventory. If the items left in inventory are known to cost $6 and $7,

Ending Inventory: $6 + $7 = $13

Each method can lead to different financial outcomes.

For instance, during inflation, FIFO often results in higher ending inventory values, while LIFO results in lower values and potentially lower taxable income.

How to Use Ending Inventory

Knowing your ending inventory isn’t just for bookkeeping—it’s a key figure that informs multiple areas of your business.

Here are the main ways you can use it:

Financial Reporting

Ending inventory is a current asset on your balance sheet and directly affects your cost of goods sold (COGS) on the income statement.

Accurate numbers ensure that your financial statements reflect the true state of your business.

Forecasting and Planning

By analyzing ending inventory over time, you can better forecast demand and plan future purchases.

This helps prevent overstocking, stockouts, and cash flow issues.

Tax and Compliance

Since ending inventory impacts COGS and net income, it also influences your tax liability. Correct valuations reduce the risk of overpaying taxes or facing issues during audits.

Inventory Optimization

Tracking ending inventory allows you to identify slow-moving products, adjust reorder points, and streamline your stock levels.

This can improve turnover rates and free up working capital.

Business Performance Analysis

Ending inventory data helps you spot trends, seasonal changes, and shifts in customer demand. With these insights, you can refine your product mix and overall business strategy.

FAQs

What happens if ending inventory is overstated or understated?

Overstating lowers COGS and inflates profit, while understating raises COGS and reduces profit. Both can distort financials and taxes.

How often should I perform a physical count to verify ending inventory?

Do a full count at least at period-end, and use cycle counts regularly to stay accurate.

Does ending inventory include damaged or unsellable products?

No, only sellable or usable items are included; damaged goods must be written off.

Conclusion

We hope this guide has helped you better understand how to calculate and manage your ending inventory.

If you’re looking for more ways to improve your operations, we regularly share insights and tips on our blog.

You can also explore our different solutions like shipping automation, carrier management, customer experience, and last-mile intelligence to see how we help businesses like yours run more efficiently.

Whether you’re in e‑commerce, retail, 3PL fulfillment, or working with enterprise or small business operations, we have tailored solutions that fit your needs.

Good luck with whatever you plan on doing next to strengthen your inventory processes, and if you ever want to talk about how we can help, you can easily contact us here or start by exploring more on our website.