Ending Inventory Calculator: From COGS, the Gross Profit Method or the Retail Method

How it works

Goods available for sale = beginning inventory + net purchases · COGS known: ending inventory = goods available − COGS · Gross profit method: estimated COGS = net sales × (1 − gross profit rate); ending inventory = goods available − estimated COGS · Retail method: cost-to-retail ratio = goods available at cost ÷ goods available at retail; ending inventory at retail = goods available at retail − markdowns − net sales − employee discounts and shrinkage; ending inventory at cost = ending retail × ratio · Turnover = COGS ÷ average inventory

Ending inventory is the cost of the goods still on hand at the end of a period. Everything you had at the start plus everything you bought is the goods available for sale; part of it was sold (cost of goods sold) and the rest is ending inventory. When you know COGS, for example from a perpetual inventory system, ending inventory is simply goods available minus COGS. When you do not know COGS and cannot count stock, accountants use two estimating methods. The gross profit method takes your normal gross profit rate from past periods, estimates COGS as sales × (1 − rate), and subtracts it from goods available. You can enter the rate as a margin on sales or as a markup on cost; a 50% markup equals a 33.33% margin. The retail method, used by stores that track goods at selling prices, works out what share of retail value your goods cost (the cost-to-retail ratio) and applies it to the retail value left on the shelves. The average cost version includes markdowns in the ratio; the conventional version leaves them out, which approximates lower of cost or market and gives a more conservative value. Employee discounts and expected shrinkage reduce the retail value on hand but, unlike markdowns, never enter the ratio. The calculator also gives gross profit, inventory turnover, days on hand and, if you enter a physical count, the shrinkage. To value inventory layer by layer with FIFO, LIFO or weighted average cost, use the FIFO LIFO calculator; to solve for COGS when you know ending inventory, use the COGS calculator.

Worked example

A shop starts the year with $50,000 of inventory at cost and makes $120,000 of net purchases, so $170,000 of goods were available for sale. Its cost of goods sold was $125,000, so ending inventory is $170,000 − $125,000 = $45,000. With $200,000 of net sales, gross profit is $75,000 (a 37.50% margin). Average inventory is ($50,000 + $45,000) ÷ 2 = $47,500, so inventory turned over $125,000 ÷ $47,500 = 2.63 times, about 138.7 days of stock on hand.

Sources: Omni Calculator: Ending inventory (beginning inventory + net purchases − COGS example) · SuperfastCPA: How to estimate ending inventory (gross profit and retail method examples) · AccountingCoach: Verifying ending inventory (gross profit and retail methods)

Frequently asked questions