How to Find Ending Inventory Without Cost of Goods Sold

Ending inventory represents the total value of goods and materials a business holds at the close of an accounting period. This figure is important for accurate financial reporting, influencing a company’s balance sheet and impacting the gross profit calculation on the income statement. While Cost of Goods Sold (COGS) is typically used, methods exist to determine this value when COGS data is unavailable. These methods help businesses understand stock levels and financial position.

Physical Inventory Taking

A physical inventory count offers the most direct and accurate way to determine ending inventory. This process involves physically counting every item in stock at a specific point in time, commonly at the end of an accounting period. It provides a direct measure of the existing inventory, independent of COGS calculation.

To ensure accuracy, businesses must organize and train counting teams, providing clear documentation. After items are counted, they are valued using an appropriate cost method, such as First-In, First-Out (FIFO), Last-In, First-Out (LIFO), or weighted-average costing. Proper “cut-off” procedures ensure transactions are recorded in the correct accounting period, including items received before the count and excluding items shipped. This approach helps reconcile physical counts with inventory records.

Estimating with the Gross Profit Method

The Gross Profit Method estimates ending inventory when a physical count is impractical or COGS figures are unknown. It relies on a business’s historical gross profit percentage. This method is often used for interim financial statements or insurance claims.

To apply this method:
First, determine the cost of goods available for sale by adding beginning inventory to purchases.
Next, estimate gross profit by multiplying sales revenue by the historical gross profit percentage.
The estimated Cost of Goods Sold (COGS) is derived by subtracting estimated gross profit from sales revenue.
Finally, subtract estimated COGS from the Cost of Goods Available for Sale to arrive at estimated ending inventory.

For example, if a business had $30,000 in beginning inventory, $60,000 in purchases, and sales of $100,000 with a historical gross profit percentage of 40%, goods available for sale would be $90,000 ($30,000 + $60,000). Estimated gross profit would be $40,000 ($100,000 0.40), leading to an estimated COGS of $60,000 ($100,000 – $40,000). Estimated ending inventory would then be $30,000 ($90,000 – $60,000). This method provides a reasonable estimate, but its accuracy depends on the consistency of the gross profit percentage.

Estimating with the Retail Inventory Method

The Retail Inventory Method is an estimation technique useful for retail businesses with high volumes of varied inventory. This method estimates ending inventory at cost using retail prices and a calculated cost-to-retail ratio. It simplifies the process for retailers who find full cost-based inventory calculation burdensome.

First, calculate goods available for sale at both cost and retail prices. Then, determine the cost-to-retail ratio by dividing cost of goods available for sale by their retail value. For instance, if goods available for sale are $90,000 at cost and $140,000 at retail, the ratio would be approximately 0.6428.

Next, subtract sales from goods available for sale at retail to find ending inventory at retail. If sales were $100,000, and goods available at retail were $140,000, ending inventory at retail would be $40,000. Finally, apply the cost-to-retail ratio to ending inventory at retail to convert it to cost ($40,000 0.6428 = approximately $25,712). This method provides a practical estimation for businesses with consistent markups.

Using a Perpetual Inventory System

A perpetual inventory system offers a continuous, real-time method for tracking inventory levels. This system uses technology like barcode scanners and point-of-sale (POS) systems to automatically update records with every purchase and sale. As items are received or sold, the system instantly adjusts the inventory count and financial data.

Since inventory levels are continuously monitored and updated, the system’s balance at any given moment represents the ending inventory. This eliminates the need for separate calculations, especially those requiring Cost of Goods Sold. The perpetual system provides an up-to-the-minute view of stock, allowing businesses to maintain accurate records without frequent manual counts.