How this calculator works
The inventory roll-forward links the stock at the start of a period to the stock at the end. Opening inventory plus purchases gives the goods available for sale. Selling cost of goods sold leaves ending inventory, which becomes the next period's opening balance. When the cost of goods sold is not known, it can be estimated from the inventory turnover ratio: turnover times average inventory equals cost of goods sold, and average inventory depends on the ending balance, so the two equations are solved together. The result is only as reliable as the purchases and turnover figures, and a physical count should replace the estimate when one is available.
Formula
Ending inventory = beginning inventory + net purchases - cost of goods sold. When cost of goods sold is unknown and turnover is known, ending inventory = (beginning inventory × (1 - turnover / 2) + net purchases) / (1 + turnover / 2) and cost of goods sold = turnover × (beginning + ending inventory) / 2.
Worked example
Beginning inventory of $100,000 plus purchases of $500,000 less cost of goods sold of $450,000 leaves ending inventory of $150,000. With a turnover of 6 instead of a known COGS, ending inventory is ($100,000 × -2 + $500,000) / 4 = $75,000, and the implied COGS is 6 × $87,500 = $525,000.
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Frequently asked questions
Why is ending inventory important?
It affects both the balance sheet and the income statement. A higher ending inventory lowers cost of goods sold and raises profit, which is why inventory valuation attracts scrutiny. It also drives the current ratio and the inventory turnover you will report next period.
What are net purchases?
Gross purchases less returns, allowances and purchase discounts, plus freight paid to bring goods in. Using gross purchases overstates the inventory available and therefore ending inventory.
Is the turnover estimate acceptable for reporting?
Usually not for audited financial statements, which require a physical count or a properly costed perpetual system. The turnover method is useful for interim management estimates and for checking whether a reported figure is plausible.