Written by:
Image
Paul Tracy

Paul has been a respected figure in the financial markets for more than two decades.

Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers. While there, Paul authored and edited thousands of financial research briefs, was published on Nasdaq. com, Yahoo Finance, and dozens of other prominent media outlets, and appeared as a guest expert at prominent radio shows and i...

View all posts
Updated August 5, 2020

What is Ending Inventory?

Ending inventory is the book value of inventory at the end of a financial or accounting reporting period.

How Does Ending Inventory Work?

Ending inventory equals the beginning inventory balance plus the cost of any inventory purchases minus the cost of any inventory sold and shrinkage.

For example: 

Sales: $15,000,000
Cost of Goods Sold:
Beginning Inventory: $7,000,000
Purchases: $13,000,000
Cost of Goods Available for Sale: $20,000,000
  Less: Ending Inventory: $8,000,000
Cost of Goods Sold: $12,000,000
Gross Profit on Sales: $3,000,000

For manufacturers, ending inventory is comprised of three account balances instead of just one; materials inventory, work in process inventory, and finished goods inventory. Materials inventory ending balance is equal to its beginning balance plus the cost of materials purchased less the cost of materials used. Work in process ending inventory balance is equal to its beginning balance plus total manufacturing costs less the cost of goods manufactured. Finished goods inventory ending balance is equal to its beginning balance plus the cost of goods manufactured less the cost of goods sold. These three account balances combined comprise the total ending inventory for manufacturers. 

Why Does Ending Inventory Matter?

Many companies take a physical count of inventory at the end of a fiscal year to verify that the inventory they actually have on hand represents what is listed on their automated systems. Often, auditors require this verification. If the tally comes out vastly different, there may be an issue of shrinkage or other issues. If the ending inventory balance is understated then, correspondingly, the net income for the same period will also be understated. 

In addition, since the later reporting periods start with the beginning balance from the previous reporting period’s ending balance, it is crucial that the correct and accurate ending balance be reported on the financial statement to ensure accuracy of future reports. 

For manufacturers, this ending inventory number is crucial in determining if they stuck to their budget and if there are production inefficiencies that should be investigated. 

Ask an Expert about Ending Inventory
At InvestingAnswers, all of our content is verified for accuracy by Paul Tracy and our team of certified financial experts. We pride ourselves on quality, research, and transparency, and we value your feedback. Below you'll find answers to some of the most common reader questions about Ending Inventory.
Be the first to ask a question

If you have a question about Ending Inventory, then please ask Paul.

Ask a question

Paul has been a respected figure in the financial markets for more than two decades. Prior to starting InvestingAnswers, Paul founded and managed one of the most influential investment research firms in America, with more than 2 million monthly readers.

If you have a question about Ending Inventory, then please ask Paul.

Ask a question Read more from Paul

Read this next

Don't Know a Financial Term?
Search our library of 4,000+ terms
Paul Tracy - profile
Ask an Expert about Ending Inventory

By submitting this form you agree with our Privacy Policy

Share
close