How to Calculate Ending Finished Goods Inventory

The value of products a business has available for sale at the close of an accounting period is known as ending finished goods inventory. This figure directly influences key financial statements, providing insight into a company’s profitability and asset valuation. Accurately determining this value involves understanding production costs and inventory flow.

Understanding Finished Goods Inventory

Finished goods inventory refers to products that have completed the manufacturing process and are ready for sale to customers. These items represent the final stage of inventory for manufacturing companies, distinct from raw materials and work-in-process. Once production is complete, the costs associated with creating these goods are transferred to the finished goods inventory account.

This inventory classification is a current asset on a company’s balance sheet. The value of finished goods inventory directly impacts the calculation of Cost of Goods Sold (COGS) on the income statement, which in turn affects a company’s gross profit.

Essential Data for Calculation

Calculating ending finished goods inventory requires several specific financial figures. Beginning Finished Goods Inventory represents the value of all completed products a company had on hand at the start of an accounting period. This figure is typically the ending finished goods inventory from the immediately preceding period.

The Cost of Goods Manufactured (COGM) encompasses all costs incurred to produce goods completed and transferred into finished goods inventory during the current accounting period. These costs include direct materials, direct labor, and manufacturing overhead.

The Cost of Goods Sold (COGS) is necessary for the calculation. COGS represents the direct costs associated with the goods sold to customers during the accounting period. This figure includes the cost of materials, labor, and overhead directly attributable to the products sold.

Calculating Ending Finished Goods Inventory

The process of determining ending finished goods inventory involves a straightforward formula that tracks the movement of completed goods. The calculation begins with the value of finished goods available at the period’s start, then accounts for newly completed products and those that have been sold.

The formula for calculating ending finished goods inventory is:

Beginning Finished Goods Inventory + Cost of Goods Manufactured – Cost of Goods Sold = Ending Finished Goods Inventory.

For example, if a company started the quarter with $100,000 in finished goods inventory, completed an additional $90,000 worth of goods during the quarter, and sold products costing $70,000, the calculation would be: $100,000 (Beginning Inventory) + $90,000 (COGM) – $70,000 (COGS) = $120,000 (Ending Finished Goods Inventory).

Inventory Valuation Methods

The method used to assign costs to inventory directly impacts the value reported for finished goods and the Cost of Goods Sold. Three widely used inventory valuation methods are First-In, First-Out (FIFO), Last-In, First-Out (LIFO), and the Weighted-Average Cost method.

Under the First-In, First-Out (FIFO) method, it assumes the first goods manufactured are the first ones sold. The costs assigned to the Cost of Goods Sold are those of the oldest inventory, while ending finished goods inventory is valued using the costs of the most recently produced items. FIFO often aligns with the physical flow of goods, especially for perishable items, and typically results in a higher ending inventory value during periods of rising costs.

The Last-In, First-Out (LIFO) method assumes the most recently manufactured goods are the first ones sold. This approach assigns the costs of the newest inventory to the Cost of Goods Sold, leaving the costs of older inventory in the ending finished goods inventory. LIFO can result in lower reported net income and potentially lower tax liabilities during inflationary periods. LIFO is permitted under U.S. Generally Accepted Accounting Principles (GAAP) but is not allowed under International Financial Reporting Standards (IFRS).

The Weighted-Average Cost method calculates an average cost for all goods available for sale during a period. This average cost is then applied to both the Cost of Goods Sold and the ending finished goods inventory. This method tends to smooth out the effects of price fluctuations on inventory valuation, providing a middle-ground approach compared to FIFO and LIFO. It is particularly useful when individual inventory items are indistinguishable.