DEFINITION of Beginning Inventory
Beginning inventory is the book value of inventory at the start of an accounting period, and is the recorded cost of inventory at the end of the preceding accounting period.
BREAKING DOWN Beginning Inventory
Beginning inventory is a current asset, which is the same as the ending inventory from the preceding accounting period. The primary use of beginning inventory is to serve as the starting point for calculating the cost of goods sold:
Beginning inventory + Purchases during the period - Ending inventory = Cost of goods sold
Beginning inventory is also used to calculate average inventory, which is used in the denominator of a number of performance measurements, such as inventory turnover, which measures how efficiently a company turns over its inventory and generates sales from it.
As inventory has to be carried by the company at the cost of capital, inventory management is one of the key drivers of success in inventory intensive sectors like retail or grocery stores – and some companies evaluate managers based on changes in inventory levels. For an even more accurate picture of inventory management, analysts can look at day sales of inventory ratio, which indicates how long it takes a company to turn its inventory into sales.
Generally accepted accounting practices require inventory to be properly accounted for according to a very particular set of inventory accounting standards, to limit companies' ability to overstate profits simply by understating inventory value.