Ending inventory - What is ending inventory?
Ending inventory is the value of the stock or product that remains at the end of an accounting period.
Ending inventory is determined by the value of the beginning inventory plus purchases, minus the cost of goods sold.
The ending inventory is always based on the market value - or lowest value of the goods that the company possesses. The cost of purchases made for the inventory is added to the value of the stock at the beginning of the chosen period.
The market value of goods created or distributed by a company is generally higher than the associated costs. However, this can change if the goods become outdated and experience depreciation and/or become obsolete.
In this case, the market value can fall below the cost of production for the goods, creating a loss in asset value.
It’s a good idea to keep track of your inventory over the entirety of the fiscal year, but ending inventory is particularly important to calculate.
Not only in order to ensure your actual stocks match with your sales and purchases over the course of the accounting period, but also because this is often required in the case of an audit.
Whether your ending inventory matches with your financial transactions can indicate how well your business has stuck to its budget and can be useful for determining whether there are any glaring problems with production costs.
It’s also important to a business because ending inventory carries over to the new accounting period. An inaccurate measure of stock value would then continue to have financial implications for the new accounting period.