What is Beginning Inventory?

Introduction to AI in Retail

Inventory management is one of the most crucial processes a business must take to protect financial health. Without knowledge of inventory terms like beginning inventory, managing your organization’s inventory becomes much more complicated. Beginning inventory – or the total dollar value of a company’s inventory at the start of an accounting period – plays a big part in many other financial decisions.

But what is beginning inventory for new business operations, and how can you calculate it? Read more to find out everything there is to know about beginning inventory!

What is Beginning Inventory?

A company’s beginning inventory is the monetary value of in-stock items at the start of a new accounting period. The term also describes the value of inventory remaining from the end of the previous accounting period.

Beginning inventory is also referred to as opening inventory, and changes in beginning inventory signify different aspects of a company’s profitability. For example, decreases in beginning inventory might indicate that a company is experiencing growth in sales, while increases might indicate fewer sales or an increase in inventory stocking.

Why is it Important to Know Your Beginning Inventory?

Beginning inventory is valuable for numerous reasons. It is important in other financial decisions and calculations, including the inventory turnover rate and total cost of goods sold (COGS). Because of this, knowing the value of your beginning inventory is highly critical to future decisions.

Beyond contributing to your understanding of the total COGS, beginning inventory is helpful for the following reasons:

• Beginning inventory allows for better demand forecasting. By determining your beginning inventory at the start of an accounting period, you can determine the amount of inventory you have to cover the upcoming period, understand how much inventory you need to avoid running out of stock, and determine how much inventory was sold during the previous accounting period.
• Beginning inventory improves your inventory management processes. By understanding how much inventory you have at the beginning of an accounting period, you can better manage your current inventory to prevent stockouts or overstocking and ensure that your current inventory is sellable.
• Beginning inventory allows you to understand your company’s overall performance. Knowing your beginning inventory reveals whether your business is selling at a suitable rate and if there are alternatives to your current inventory management process that can help maximize your performance.

How do Businesses Use Beginning Inventory?

Beginning inventory helps with numerous business processes, making it incredibly valuable for your company’s success and for preventing stockouts. Below are some ways companies use beginning inventory to help with other processes.

Tax Documentation

Knowing your beginning inventory is crucial for tax documentation in the event of something going wrong that damages your current inventory. By having a current inventory balance, you can determine the amount lost in an accident for tax deductions. Additionally, beginning inventory helps because it contributes to understanding your company’s COGS, which is important for determining potential tax deductions.

Internal Accounting

Your beginning inventory also contributes to understanding your internal accounting processes. An accurate number for your current inventory stock at the start of an accounting period helps you understand your future inventory requirements, providing vital information on production needs, reorder amounts, and other financial details. Without this information, internal accounting processes are prone to inaccuracies that can cause financial difficulties down the line.

Better Balance Sheets

Knowing your beginning inventory is crucial to keeping accurate balance sheets. Balance sheets provide crucial information on your company’s financial well-being – information that stakeholders and investors need to feel confident in your organization’s potential. Beginning inventory calculations ensure accurate documentation and reporting.

What is the Beginning Inventory Formula?

Understanding how to find beginning inventory is essential to making financial decisions that help your company grow. Calculating this number is possible with the right beginning inventory equation: (COGS + ending inventory) - inventory purchases. This equation is the simplest way to calculate beginning inventory accurately for more informed decision-making.

How to Calculate Beginning Inventory

Now that you have the beginning inventory formula, you can start calculating your beginning inventory. You can do this easily with the (COGS + ending inventory) - inventory purchases equation, such as in the following example:

• COGS: $40,000
• Ending inventory: $60,000
• Inventory purchases: $10,000

In this situation, your calculation would be ($40,000 + $60,000) - $10,000 = $90,000 beginning inventory valuation.

Let’s look at another example:

• COGS: $70,000
• Ending inventory: $90,000
• Inventory purchases: $30,000

In this scenario, you would end up with the calculation ($70,000 + $90,000) - $30,000 = $130,000 beginning inventory valuation.

Valuing Your Inventory

Another crucial component of determining beginning inventory is understanding your inventory valuation. Companies typically use one of the following methods to value inventory: weighted average cost, specific assigned value, last in, first out (LIFO), and first in, first out (FIFO). Below is a breakdown of each method.

• Weighted average cost: This method is the average value of all inventory and is usually used when all your inventory is the same. This value is calculated by adding the total cost of goods purchased divided by the number of inventory items within a specific accounting period.
• Specific assigned value: This valuation is used for expensive inventory items and helps companies track individual inventory products. With this method, items are priced individually and tracked from the initial purchase to when the item is sold. Items have an RFID tag or serial number for individual tracking.
• Last in, first out: The LIFO method assumes that your newest inventory items will be sold or used first. Inventory costs are determined when calculating the COGS. The COGS is higher, and the gross income is lower than with the FIFO valuation method.
• First in, first out: The FIFO method assumes that inventory purchased first is sold first. The cost of your earliest inventory is determined when calculating the total COGS, and this method usually results in a lower COGS with a higher gross income than the LIFO method.

Navigate Beginning Inventory

Using inventory counting software is essential to accurately determine your beginning inventory amount. With Zupan, you can count your inventory effortlessly with advanced inventory counting software to make your business more efficient. Learn more about the Zupan solution today.