Definition of Ending Inventory

Ending inventory is the value of remaining unsold stock at the end of an accounting period, determined through physical inventory count or accounting records. It is used to calculate cost of goods sold and appears as a current asset on the balance sheet, becoming the beginning inventory for the following period.

Methods of Valuing Ending Inventory

The methods for valuing ending inventory depend on the accounting policies followed and the nature of the business activity:

Basic Valuation Methods

• First In, First Out (FIFO) - Assumes the oldest goods are sold first, so inventory is valued at the most recent purchase prices
• Last In, First Out (LIFO) - Assumes the newest goods are sold first, so inventory is valued at the oldest purchase prices
• Weighted Average - Calculates the average cost of all purchases and applies it to the remaining inventory

Appearance of Ending Inventory in Financial Statements

In the Balance Sheet

Ending inventory appears as a current asset under the inventory item, valued at the lower of cost or market price, representing the value of unsold goods available for sale in the upcoming period.

In the Income Statement

Ending inventory plays an important role in calculating cost of goods sold, where it is subtracted from total cost (beginning inventory + purchases), reducing cost of goods sold and positively affecting gross profit.

In the Cash Flow Statement

Changes in ending inventory affect cash flow from operating activities, where an increase in inventory is considered a use of cash and reduces cash flow, while a decrease in inventory increases cash flow.

In Notes to Financial Statements

Disclosure must be made about the accounting policies followed in inventory valuation and calculation methods used, in addition to any decline in inventory value or provisions for damage and obsolescence.