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How To Calculate Ending Inventory And Why It Matters?

Posted by: Amogh Balaji

Inventory management refers to many tasks, including stock tracking, forecasting, and optimizing. Those activities provide insights into store inventory so retailers can curb costs and boost inventory ROI. There’s one more critical activity that matters in inventory management. And that is the calculation of ending inventory. There are several reasons why it is essential.

In this article, we go over what ending inventory is, what the different ways of calculating it are, how it matters, and finally, how a POS system helps. Let’s get started.

What is ending inventory?

At the end of every accounting period, your store will have a specific amount of inventory that amounts to a total value. That total inventory value is what is known as ending inventory. The most effective way of calculating ending inventory is to take a physical count of your store’s stock. However, bear in mind that the stock quantity isn’t of significance, but the value is.

Different ways of calculating ending inventory

The universal formula for calculating ending inventory is straightforward.

Initial inventory + Newly added inventory – COGS = Ending inventory

The initial inventory is the inventory you had towards the end of the previous accounting period. The newly added inventory is the stock you’ve bought and added to the initial inventory. The cost of goods sold is the total cost of finished goods that are ready to sell.

That’s not the only way to calculate ending inventory. Let’s look at some more calculation methods that are more accurate in determining the total value of your inventory.

FIFO calculation

The First In First Out inventory tracking method assumes the first stock purchased is the first to get sold. Using this protocol, your earlier purchases are added to the ending inventory, whereas the latest inventory purchases are added to COGS.

For example, let’s say you have an initial inventory of 200 units at $5 per unit. Later, you add 200 more units to your inventory at $6 per unit. And in the entire period, you sell 220 units. As per FIFO, you’ll calculate the cost of the first 200 units (5×200 = $1000) plus the 20 new stock units (6×20 = $120). Your total COGS will be $1120

Using the universal formula:

$1000 + $1200 – $1120 = $1080 (ending inventory)

LIFO calculation

In the Last In Last Out tracking protocol, the inventory purchased the latest gets sold first. And that is considered COGS. This inventory calculation method is the opposite of the FIFO method.

For example, let’s say again you have an initial inventory of 200 units at $5 per unit. Later, you add 200 more units to your inventory at $6 per unit. And in the entire period, you sell 220 units. As per LIFO, you’ll calculate the cost of the last 200 units (6×200 = $1200) plus the 20 old stock units (5×20 = $100). Your total COGS will be $1300

Using the universal formula:

$1000 + $1200 – $1300 = $900 (ending inventory)

Weighted average calculation

In the WAC protocol, you calculate the ending inventory by averaging the total cost of the inventory by the total number of units in possession.

For example, let’s say again you have an initial inventory of 200 units at $5 per unit. Later, you add 200 more units to your inventory at $6 per unit. And in the entire period, you sell 220 units. As per WAC, the total cost of your inventory is (1000+1200 = $2200). By dividing that value by the number of units in possession it is 2200/400 = $5.5 per SKU. Multiply that number by the number of units sold – 220 x 5.5 = $1210.

$1000 + $1200 – $1210 = $990

Why does it matter?

Calculating the ending inventory is essential for:

  • Aligning inventory in the records with the actual inventory in the possession
  • Figuring out the net income
  • Making sure that future reports are accurate

How a POS system helps

A Point of Sale software application integrates with barcode scanners. The integration makes tracking and counting inventory as easy as pointing the scanner onto a barcode tag. Furthermore, the software will have an in-built ending inventory calculator.

Summing up

Knowing how much inventory you’re selling and how much you’re not is crucial. In addition to that, unexpected shrinkage of inventory can make your store run out of stock. The best practice to avoid such situations is to calculate ending inventory. If you’re looking for a POS system to make the calculation a smooth process, then get SmartPOS. It has all the features to speed up the calculation and produce accurate values. Reach out to us to know more.

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