Beginning inventory is an important concept in business operations and financial management. As an important part of proper inventory management, beginning inventory is the platform for many key financial decisions.
In this article, we will discuss what is beginning inventory and how it shapes the framework of modern business.
Beginning Inventory Meaning
Beginning inventory is the total value of goods ready to sell or use. Think of it as the starting point for counting what a business has. Changes in the beginning inventory can tell major changes in the business operations.
- If it goes down, it means more sales.
- On the other side, an increase could mean sales are slowing down.
By keeping an eye on the beginning inventory, a business can spot shifts in the market, predict what it'll need in stock, and make smarter decisions.
Beginning Inventory: Key Takeaways
At the start of a financial year, beginning inventory is the money worth of a company's stored goods.
- Businesses can decode sales patterns by checking out beginning inventory, allowing for smarter strategies, budgets, and predictions.
- Companies estimate their beginning inventory using FIFO, weighted average cost, LIFO, or specific assigned value.
- To estimate the value of beginning inventory, you calculate COGS, what's left in stock, and what you've bought in a specific time frame.
Defining Beginning Inventory
Based on the financial reports, companies showcase their inventory as a 'right-now' asset. It reveals how the business works and the money they make at a specific time, like a month or a year.
Beginning inventory is like a toolkit; it includes products, raw materials, and semi-finished goods. When one accounting time frame ends, what's left in stock rolls over to the next period. But only the leftover stock appears on the financial report.
Imagine a clothing company checking its stock each month. If they end March with 1,000 unsold clothing items valued at Rs. 50,000, that's the leftover stock for March and also the beginning stock for April.
Beginning Inventory: Why Is It Important for Businesses?
The beginning inventory isn't just about counting stocks. It shows trends in sales and how things run, leading to better ways to handle inventory and make more money.
It doesn't matter if the business is small or big; beginning inventory is important. It helps figure out product prices, when to restock or get rid of items, and where to put the money.
The beginning inventory regulates external and internal business functions. It helps to know the COGS, which helps guess how much money a company will make.
What Is the Use of Beginning Inventory in Businesses?
Here are three main uses of beginning inventory in Businesses:
1. Balance Sheets
A balance sheet records the company's liabilities and assets. It shows what the company has and owes. While the beginning inventory doesn't show up on the balance sheet, you can guess it by looking at the ending inventory on the sheet.
2. Internal Accounting
Checking inventory at the start of a financial period helps plan for the future. It decides if the company needs more or less materials to make or sell. Also, it catches any changes or losses in inventory, like theft or wrongly counted stock.
3. Taxes
Picture a warehouse gone in flames. If the company knows how much stuff it had at the start, it can figure out how much money it lost. It helps with taxes and getting some money back from the insurance. Apart from this - taxes are based on the cost of goods sold in the beginning inventory.
What Is the Best Way to Value Inventory?
There are four ways to put a value inventory in stock:
1. FIFO
FIFO means selling the oldest stock or inventory first. This way, the oldest stuff gets counted first when figuring out costs. It often makes prices seem lower and profits higher.
2. LIFO
LIFO is the opposite of FIFO. It says the newest item is the first to go. LIFO often reduces the company's tax payment, which in turn helps improve the amount of available cash.
3. Weighted Average Cost
This method is used when a company has identical items in stock. This method helps even out price changes when inventory is purchased slowly over time.
4. Specific Assigned Value
This method is used for pricier items such as vehicles and closely monitors each item in stock. Each item gets its price, and it's easily identified with a unique serial number or an RFID tag. This method of assigning precise values is seen as the most accurate way to figure out the real value of the inventory.
Ratios, Calculations, and Formulas for Beginning Inventory
While a company's beginning inventory doesn't show up on financial statements, several important measures rely on it for their calculations. These measures include:
Cost of Goods Sold (COGS)
COGS = (beginning inventory + all purchases) - ending inventory
Inventory Turnover
Inventory turnover ratio = COGS / average inventory
Days in Inventory (DII)
DII = (average inventory / COGS) x number of days in the period
Calculating the Beginning Inventory
Beginning Inventory can be calculated using this formula:
Beginning inventory = (COGS (cost of goods sold) + ending inventory) - inventories purchased
Track and Control Inventory With Software
Effective inventory management is important for companies that sell products. Having a real-time overview of inventory across various locations and sales platforms helps companies manage stock better.
Inventory management software automates inventory tracking, order processing, and sales management. Such software monitors inventory levels and tracks inventory value.
These factors are important for calculating starting and ending inventory, COGS, turnover ratio, and other vital accounting figures.
Simplify Beginning Inventory With TranZact
TranZact simplifies the process of tracking beginning inventory with its inventory management software. Businesses can perform operations smoothly, knowing that they have a clear view of what they have in stock.
TranZact takes the stress out of inventory management, giving Indian SMEs more time to focus on growing their business.
FAQs on Beginning Inventory
1. What is the beginning inventory?
Beginning inventory is the amount of goods a company has on hand at the start of an accounting period.
For example, a toy store starts a new financial year in January. At the beginning of the year, their inventory had 500 toy cars, 300 dolls, and 200 board games. These represent their beginning inventory for January.
2. Why is beginning inventory important?
Beginning inventory is important because it sets the baseline for tracking changes in inventory levels, which impacts financial and operational decisions.
3. How is beginning inventory calculated?
Beginning inventory is usually determined by physically counting items on hand or using the ending inventory from the previous period.
4. Is beginning inventory the same as ending inventory?
No, beginning inventory is the stock at the start of the period, while ending inventory is what's left at the period's end.
For example, At the end of the financial year in December, a toy store had 450 toy cars, 320 dolls, and 180 board games left in their inventory. These represent the ending inventory for the month of December
5. Can beginning inventory affect a company's financial statements?
Yes, it's a key factor in calculating costs, profits, and turnover, affecting the income statement and balance sheet.
6. What problems can an incorrect beginning inventory cause?
Incorrect beginning inventory can lead to wrong financial calculations, over/underestimation of profits, and poor purchasing decisions.
7. How does technology help manage beginning inventory?
Inventory management software or technology helps manage beginning inventory by tracking, reducing errors, improving accuracy, and providing real-time insights.
