Ending Inventory Calculator

What this calculator does

At the end of a month or a year, a business needs to know the value of the stock still sitting on its shelves. That figure is the ending inventory, and it appears on the balance sheet as an asset. This calculator works it out from what you started with, what you bought, and what you sold:

Ending inventory = Starting inventory + Net purchases − Cost of goods sold

It also returns a second figure, the inventory turnover, which measures how many times the stock was sold and replaced over the period. Both come from the same short arithmetic, and the logic underneath it is worth a moment because it explains why this modest number carries more weight than it looks like it should.

Everything available for sale ends up in one of two places

Start with what the business had to sell during the period. That is the stock it began with plus everything it bought, and accountants call the total the goods available for sale.

Now, by the end of the period, every one of those items is in exactly one of two states. Either it was sold, in which case its cost has become cost of goods sold and sits on the income statement as an expense. Or it was not sold, in which case it is still in the warehouse and its cost sits on the balance sheet as ending inventory. There is no third option, which gives a clean identity:

Goods available for sale = Cost of goods sold + Ending inventory

The calculator simply rearranges that. If you know what was available and what was sold, what remains is what is left. Simple enough, and yet the fact that these two figures are joined at the hip has a consequence that the section below is entirely about, because it means you cannot move one without moving the other.

Three figures, and a second output you may not expect

1. Starting inventory. The value of stock at the beginning of the period, which is the previous period's ending inventory.
2. Net purchases. Everything bought during the period, after deducting returns to suppliers and any purchase discounts. "Net" is doing real work here.
3. Cost of goods sold. The cost of the items sold during the period, from the income statement.

Alongside the ending inventory, the tool returns the inventory turnover, which is cost of goods sold divided by the average of your opening and closing inventory. It answers a different and very practical question: how many times over did the business sell through its stock? A high figure means goods move quickly and little capital sits idle, though pushed too far it can mean running short and losing sales. A low figure means stock is sitting, tying up cash and risking obsolescence. As with most ratios, what counts as healthy depends heavily on the trade, since a bakery and a jeweller should look nothing alike.

A trading period, worked through

Take a business that began the period with 250,000 of stock, bought a further 900,000, and recorded cost of goods sold of 850,000.

• Goods available for sale: 250,000 + 900,000 = 1,150,000
• Ending inventory: 1,150,000 − 850,000 = 300,000
• Check the identity: 850,000 sold + 300,000 remaining = 1,150,000, which is exactly what was available
• Average inventory: (250,000 + 300,000) ÷ 2 = 275,000
• Inventory turnover: 850,000 ÷ 275,000 = 3.09 times

So the business finished with 300,000 on the shelves and turned its stock over roughly three times during the period. Stock grew by 50,000 across the period, which is worth noticing on its own: the company bought more than it sold. Occasionally that is deliberate preparation for a busy season. Persistently, it is how businesses quietly accumulate goods nobody wants.

Why this is the number auditors look at hardest

Return to the identity for a moment, because it has a sharp edge. Goods available for sale is a fixed, verifiable total: you know what you started with and what you bought. That total then splits between cost of goods sold and ending inventory. Which means the two are locked together, and every unit you add to one you must take from the other.

Follow what that does to profit. Suppose the ending inventory in the example above were recorded as 350,000 instead of 300,000, an overstatement of 50,000. Since goods available is fixed at 1,150,000, cost of goods sold must fall to 800,000. Cost of goods sold is an expense, so a 50,000 reduction in it raises gross profit by exactly 50,000. Nothing was sold, no customer paid anything, and the company just reported 50,000 more profit.

That is why inventory attracts such close attention. It is the one balance sheet figure that feeds directly into the income statement through a fixed arithmetic link, and it is valued partly by counting things in a warehouse, which is a far softer process than reconciling a bank statement. An overstatement can be entirely innocent, a miscount or obsolete stock that nobody wrote down. It can also be deliberate. Either way the effect on reported profit is identical, and it works in both directions: understate closing stock and you understate profit just as reliably.

The practical habit for anyone reading accounts is to watch inventory against sales. When stock is rising much faster than revenue, either the business is preparing for growth that has not arrived yet, or goods are not moving and the value on the balance sheet is optimistic. The turnover figure this tool produces is the quickest way to see which way that is going.

Two companies, identical shelves, different answers

One more thing to know before treating this number as objective. Even with a perfect count of physical goods, the value placed on them depends on a choice the company makes about which costs attach to what was sold.

If a retailer bought identical items at different prices over the year, and then sells some, which ones did it sell? Under first in, first out, the oldest costs are assumed to go out first, which leaves the most recent, usually higher, costs on the shelf. Under a weighted average, all the costs are pooled and averaged. Some jurisdictions permit further methods. The physical stock is identical in every case; the number on the balance sheet is not, and neither is the cost of goods sold, and therefore neither is the reported profit.

This calculator does not choose for you. It works from the cost of goods sold figure you provide, which already reflects whatever method the accounts use. The point to carry away is that when you compare the inventory or the margins of two companies, you should know whether they are using the same method, because a visible difference between them may be describing accounting policy rather than anything about the businesses.

Questions people ask

What are net purchases?

Everything bought during the period, less returns to suppliers and purchase discounts, plus freight-in where the company includes it. Use the net figure, not gross purchases.

My ending inventory came out negative. What went wrong?

Almost certainly a data error, since you cannot sell more than you had available. Check that cost of goods sold covers the same period as the purchases and that nothing has been double counted.

What does the inventory turnover figure tell me?

How many times the business sold and replaced its stock during the period. Higher generally means stock moves briskly and less cash is tied up, though an extreme figure can mean running out and losing sales.

How does ending inventory affect profit?

Directly. Goods available for sale is fixed, so a higher ending inventory means a lower cost of goods sold and therefore a higher reported profit, and vice versa. The two figures always move in opposite directions.

References

Ending inventory and cost of goods sold together account for the goods available for sale, so the two are interdependent: when inventory values are wrong, the related income statement and balance sheet figures are wrong too. The choice of cost allocation method, such as first in first out or weighted average, produces marked differences in reported cost of goods sold, net income and inventory balances even for identical physical stock.

1. OpenStax, Principles of Accounting, Volume 1: Financial Accounting, 10.2 Calculate the Cost of Goods Sold and Ending Inventory Using the Periodic Method. https://openstax.org/books/principles-financial-accounting/pages/10-2-calculate-the-cost-of-goods-sold-and-ending-inventory-using-the-periodic-method
2. OpenStax, Principles of Finance, 6.2 Operating Efficiency Ratios. https://openstax.org/books/principles-finance/pages/6-2-operating-efficiency-ratios