When the LIFO method is used at what cost is each item in ending merchandise inventory recorded?
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Ending inventory is the total value of goods you have available for sale at the end of an accounting period, like the end of your fiscal year. It’s an inventory accounting method that helps retailers benchmark net income, obtain financing, and run accurate stock checks. Show
Knowing your ending inventory value will impact your balance sheets and taxes. Before filing your income taxes or other important tax deadlines, it's important to calculate the total value of your inventory for that year correctly. This guide shares how to do it, with examples and tips to help you control inventory more accurately (and less stressfully). What is inventory value?Inventory value is the total dollar value of the inventory you have left to sell at the end of an accounting period. You’ll often see it listed on financial statements, including your balance sheet, at the end of an accounting year. In simple terms: If you start the month with $500 worth of items and sell $300 worth of stock, your ending inventory would be $200. Why do you need to calculate ending inventory?Your ending inventory balance isn’t just a metric to keep an eye on at year end. It’s an inventory valuation method to consider throughout the year. Here’s why. Accurate inventory count"Completing a full physical inventory count is the best way to calculate your ending inventory and start the new year on the right foot," explains Jara Moser, Digital Marketing Manager at Shopventory. "While counting every product in the store seems tedious, it ensures the products on your shelves match what’s in your books. It also means getting eyes on inventory hiding in the corner of your backstore and discovering operational trends, such as receiving errors." If the ending inventory for your homeware line is $5,000 but you only counted $4,650 worth of goods in your stockroom, for example, you have phantom inventory and it’s time to investigate what's causing inventory shrinkage. Employee theft, return fraud, or shoplifting could be the issue.
Accurate inventory counting helps plan your open-to-buy budget, too. There’s not much sense in investing $10,000 into stock replenishment if you have $7,500 worth of unsold inventory. Avoid relying on intuition and ordering excess safety stock if sellable products are lingering in your stockroom–a well-organized stockroom can help mitigate this issue as well. Calculate net incomeNet income is one of the most important financial metrics for retailers to consider. It’s the money left in your bank account after paying for expenses—such as staff salaries, tax, and production costs—over a given period, usually shown on an income statement. Benchmark your ending inventory value against your net income to see whether you’re overpaying for goods or underpricing stock. If your ending inventory is $25,000 but your net income is just $20,000, you’re holding more money in inventory than you’ve generated in sales. Overpaying for stock could be the issue. Consider bartering with suppliers or increasing product prices for a healthier net income–to–ending inventory ratio.
Inform future reportsOnce year end passes, the ending inventory recorded on your balance sheet acts as the beginning inventory for the following year. Get your calculations wrong, or use a combination of methods (more on that later), and you’re setting yourself up for problems down the road. Manage inventory from one back office Shopify POS comes with tools to help you manage warehouse and store inventory in one place. Forecast demand, set low stock alerts, create purchase orders, know which items are selling or sitting on shelves, count inventory, and more. Let’s put that into perspective and say your ending inventory for 2021 was valued at $50,000. Going into the following year, that figure would be listed as your starting inventory. Once 2022 ends, you’ll use it to calculate your ending inventory for that financial year. That’s much easier to do if the ending inventory for the year prior was accurate. Obtain financingWhether you’re looking for extra cash to buy more physical inventory items or take on new retail associates, lenders will want to see your financial statements before giving away money. Loans exist to help retailers survive tough financial periods. They’re available so you don’t join the 82% of small businesses who shut up shop because of poor cash-flow management. "From opening a second retail location to manufacturing your own product line, lenders need an accurate portrayal of your business," explains Jara.
Ending inventory is one metric they’re looking at, because it’s considered an asset. Lenders may be more willing to give your business funding—on more favorable terms—if the business has a low debt-to-asset ratio. How to calculate ending inventoryKnowing your ending inventory gives you greater control over stock-related and financial decisions. So, how do you calculate it? Below are six methods to choose from.
Bear in mind that whichever method you choose, you’ll need to stick with it. Financial reports become inaccurate—and the chance for mistakes become higher—if you’re switching between multiple ending inventory formulas. 💡 PRO TIP: Rather than wait until the end of the year, view the Month-end inventory value report in Shopify admin to get a snapshot of your inventory’s cost, ending quantity, and total value each month. If you see negative ending quantities, that’s a sign your inventory quantities for that product are incorrect and need to be reconciled. Ending inventory formulaThe simplest way to calculate ending inventory is using this formula: Beginning inventory + new purchases - cost of goods sold (COGS) = ending inventory For example, if your beginning inventory was worth $10,000 and you’ve invested $5,000 in new products, you’d be sitting on $15,000 worth of inventory. Minus the $12,000 worth of products you’ve sold through the same period, ending inventory would be $3,000.
Retail methodDesigned for stores that do physical stock checks, you’ll need a few metrics on hand before using the retail inventory method to calculate ending inventory:
From there, calculate ending inventory with this formula: Cost of goods available for sale - cost of sales = ending inventory. Find your ending inventoryKnowing how much cash is tied up in inventory helps you make smarter business decisions—from accurate stock-taking reports to sensible open-to-buy budgets. Just remember that whichever formula you use is the one that’ll see you throughout your store’s lifetime. Accurate and clear financial reports make your life easier down the road. Stay on top of your finances With Shopify POS, it’s easy to create reports and review your finances including sales, inventory value, returns, taxes, payments, and more. View your financial data for all sales channels from the same easy-to-understand back office. What is the cost of ending inventory using LIFO?To calculate COGS (Cost of Goods Sold) using the LIFO method, determine the cost of your most recent inventory. Multiply it by the amount of inventory sold.
How do you find the ending merchandise inventory using LIFO?According to the LIFO method, the last units purchased are sold first, so the value used for the ending inventory formula is based on the cost of the oldest units. This means that the ending inventory for this period for Invest Media would be 2,250 x 10 = $22,500.
When would you use LIFO inventory method?The LIFO method is used in the COGS (Cost of Goods Sold) calculation when the costs of producing a product or acquiring inventory has been increasing. This may be due to inflation.
Why does LIFO have higher ending inventory?LIFO allows for higher after-tax earnings due to the higher cost of goods. At the same time, these companies risk that the cost of goods will go down in the event of an economic downturn and cause the opposite effect for all previously purchased inventory.
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