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.