Beginning Inventory

What Is Beginning Inventory?

Beginning inventory is the book value of a company’s inventory at the start of an accounting period. It is also the value of inventory carried over from the end of the preceding accounting period.

Understanding Beginning Inventory

Inventory is a current asset reported on the balance sheet. It is a combination of both goods readily available for sale and goods used in production. Inventory, in general, can be an important balance sheet asset because it forms the basis for a business’s operations and goals. It can also potentially be used as collateral for credit borrowing.

Beginning inventory is the book value of inventory at the beginning of an accounting period. It is carried forward as the value of ending inventory in the preceding period. Inventory can be valued using one of four methods: first in, first out (FIFO); last in, first out (LIFO); weighted average cost; and specific assigned value. Inventory accounting is defined by the required standards a business must use. Generally, companies must choose and keep an inventory accounting method that works best for their business.

The four of the most common methods for valuing inventory include: first in, first out (FIFO); last in, first out (LIFO); weighted average cost; and specific assigned value.

Comprehensively, managing inventory by cost and units is important for operational efficiency. Inventory managers are responsible for maintaining inventory cost records, monitoring the movement of inventory, managing inventory operations, ensuring against inventory theft, and managing units of inventory held.

Inventory managers usually have a daily log of inventory statistics, with responsibility for calculating and reporting inventory metrics to management at specific intervals. This is where beginning and ending inventory calculations are involved. Overall, there are several important business metrics and ratios in financial analysis that include inventory and measure its efficiency.

Special Considerations: Inventory Metrics and Ratios

Inventory forms the basis for the cost of goods sold (COGS) calculations which constitute the total cost a company incurs per unit. Companies seek to have the lowest cost of goods sold and the highest optimal selling price in order to make the greatest profit per unit. As such, gross profit and its key component, cost of goods sold, serve as one starting point for inventory metrics.

  • COGS = beginning inventory + inventory purchases during the period - ending inventory

In this equation, beginning and ending inventory help the company to identify its COGS for a specific period. This is also in line with accrual accounting which requires that both revenue and expenses be recorded at the time of sale which further corresponds with the time that inventory should be depleted.

Beginning inventory is also used to calculate average inventory, which is then used in performance measurements. Average inventory is the result of beginning inventory, plus ending inventory, divided by two. Inventory turnover and inventory days are two of the most important balance sheet ratios involving inventory.

Inventory Turnover

Inventory turnover measures how efficiently a company turns over its inventory in terms of COGS. It is calculated by COGS for a period divided by average inventory. It provides a ratio for understanding the movement of inventory and how often inventory was replaced during a specific period. The higher the inventory turnover ratio the better inventory is turning over and being utilized.

Inventory Days

Inventory days is a metric that can also be referred to as days sales of inventory. It identifies the number of days it takes a company to convert inventory to sales. The lower the inventory days the faster and more efficiently a company is selling inventory. Inventory days can be calculated by using average inventory for a period divided by costs of goods sold for a period, all multiplied times the number of days in the period.

Key Takeaways

  • Beginning inventory is the book value of inventory at the beginning of an accounting period.
  • Companies must choose an inventory accounting method for calculating the value of inventory.
  • Beginning inventory is a component of several inventory performance metrics used to analyze inventory efficiency.
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