Definition:
Beginning inventory refers to the value of inventory that a company has on hand at the start of an accounting period. It’s one of the key components of the cost of goods sold calculation.
Formula:
Cost of Goods Sold = Beginning Inventory + Purchases – Ending Inventory
Key points about beginning inventory:
- Balance sheet: Beginning inventory is reported on the balance sheet as a current asset.
- Cost of goods sold: Beginning inventory is used to calculate the cost of goods sold, which is an expense on the income statement.
- Inventory valuation: The value of beginning inventory is determined using an inventory valuation method, such as FIFO, LIFO, or average cost.
Why is beginning inventory important?
- Cost of goods sold: Beginning inventory is a key component of the cost of goods sold calculation, which affects a company’s profitability.
- Financial statements: Beginning inventory is reported on the balance sheet and income statement, and it’s used in various financial ratios.
- Inventory management: Understanding beginning inventory is important for effective inventory management.
In essence, beginning inventory is the value of inventory on hand at the start of an accounting period, and it’s a crucial component of financial reporting and inventory management.
