What is Closing Stock?
Closing stock or inventory is the amount that a company still has on its hand at the end of a financial period. This inventory may include products that are getting processed or are produced but not sold. On a broad level, it includes raw material, work in progress, and finished goods—the units of closing stock help in determining the total amount. Below is the formula to calculate closing stock
Closing Stock Formula (Ending) = Opening Stock + Purchases – Cost of Goods Sold.
Top 4 Methods to Calculate Closing Stock
The top 4 most common methods to calculate closing stock are as follows –
1.FIFO inventory method
assumes inventory which is brought first will be sold first, and the latest and the newest inventory is kept unsold. It means that the cost of older inventory is assigned to the cost of goods sold and the cost of the newer inventory is assigned to ending inventory
FIFO Example
Beginning Inventory – 10 units @ $5 per unit
Purchase – 140 units @ $6 per unit
Sale – 100 units @ $5 per unit
Ending inventory – 10 + 140 – 100 = 50
Ending inventory amount ($) – 50 * $6 = $300
2.LIFO Inventory Method
assumes that the last item purchased will be sold off first. This method can be used for products which are not perishable or can be obsolete
LIFO Example
Beginning Inventory – 10 units @ $5 per unit
Purchase – 140 units @ $6 per unit
Sale – 100 units @ $5 per unit
Ending Inventory – 40 + 10 = 50
Ending inventory amount ($) – 40 * $6 + 10 * $5 = $240 + $50 = $290
3. Average cost method
Under this method, the weighted average cost is calculated for the closing stock. It is calculated as – cost of goods in inventory/total units
Average Cost Example
Beginning Inventory – 10 units @ $5 per unit
Purchase – 140 units @ $6 per unit
Sale – 100 units @ $5 per unit
Weighted average cost per unit – (10 * 5 + 140 * 6)/150 = $5.9
Closing stock amount ($) – 50 * $5.9 = $295
4 Gross profit method
Gross Profit method is also used to estimate the amount of closing stock.
Step 1 – Add the cost of beginning inventory. The cost of purchases we will arrive at the cost of goods available for sale.
Step 2 – Multiply (1 – expected gross profit) with sales to arrive at the cost of goods sold
Step 3 – Calculate Closing Stock – To arrive at this amount, we will have to subtract the estimated cost of goods in step two from the cost of goods available for sale
in step one.
Gross Profit Method Example
Beginning Inventory – 10 units @ $5 per unit
Purchase – 140 units @ $6 per unit
Sale – 100 units @ $5 per unit
Cost of Goods Available for Sale = 10 x 50 + 140 x 6 = 940
Expected Profit margin
= 40%
Sales = 100 x 5 = 500
Cost of Goods Sold
= 500 x (1-40%) = 300
Closing Stock ($) = 940 – 300 = 640
The drawback of this method is that the estimation of gross profit in step 2, base on the historical estimate, which may not necessarily be the case in the future. Also, if there are any inventory losses in that period are higher or lower than the historical rates, it can lead to an inappropriate amount of closing inventory.
