A company’s merchandise inventory is an account that shows the total amount the company paid for products it has yet to sell to customers. Although a company reports this amount on its balance sheet, it also uses the amount to calculate its cost of goods sold on its income statement. You can calculate merchandise inventory by using items listed on a company’s income statement, and you can calculate it for different time periods to measure the company's inventory management. An inventory balance that grows disproportionately more than sales may suggest trouble selling its products.
Find the amounts of a company’s beginning inventory and its net purchases listed in the cost of goods sold calculation section of its income statement. For example, assume a company has $50,000 in beginning inventory and $20,000 in net purchases.
Add net purchases to beginning inventory to calculate goods available for sale. For example, add $20,000 in net purchases to $50,000 in beginning inventory, which equals $70,000 in goods available for sale.
Find the amount of the company’s cost of goods sold on its income statement. For example, assume the company’s cost of goods sold is $30,000.
Subtract the amount of cost of goods sold from goods available for sale to calculate the amount of the company’s merchandise inventory at the end of the accounting period. For example, subtract $30,000 in cost of goods sold from $70,000 in goods available for sale, which equals $40,000 in merchandise inventory at the end of the accounting period.
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