Employees are often called a company’s greatest strength, and that’s true. But inventory, and how it’s managed, is just as important to a business’s financial health. Without knowing how much stock is on hand or its value, it’s impossible to plan new orders or estimate profits. Beginning inventory is the total value of goods a business has at the start of an accounting period. It also helps calculate key financial metrics like cost of goods sold (COGS) and inventory turnover rate.

What Is Beginning Inventory?

Beginning inventory is the total value of goods a business has in stock and ready to sell or use at the start of a new accounting period. It’s also called opening inventory and is the same as the ending inventory from the previous period. Changes in beginning inventory can mean different things.

A decrease might show strong sales or possible supply issues. An increase could mean the business is preparing for a busy season or that sales have slowed down. Tracking beginning inventory helps a business spot market trends, plan future inventory needs, and make better financial decisions.

Key Takeaways

Beginning inventory is the total value of a company’s stock at the start of an accounting period.
It helps businesses track sales trends for better planning, budgeting, and forecasting.
Businesses can value beginning inventory using four methods: FIFO, LIFO, weighted average cost, or specific identification.
To calculate beginning inventory, you need to know the cost of goods sold (COGS), ending inventory, and purchases for the period.

Beginning Inventory Explained

Companies list inventory as a current asset on their balance sheets. This shows how their business is performing and how much potential revenue they can earn during an accounting period, whether it’s a month, quarter, or year. Beginning inventory includes finished goods ready to sell, raw materials, parts, and work in progress.

The ending inventory from one period becomes the beginning inventory for the next. For example, if a sneaker company ends March with 1,000 unsold pairs of shoes worth $50,000, that $50,000 is both its ending inventory for March and its beginning inventory for April.

Why Is Beginning Inventory Important?

Beginning inventory helps businesses identify sales patterns, improve inventory management, and increase profits. Whether it’s a small shop or a global company, knowing the accurate value of inventory helps decide product pricing, when to reorder or write off items, and how to allocate budgets effectively.

It’s also a key part of inventory accounting used for both internal tracking and external reporting. Beginning inventory is included in the cost of goods sold (COGS) formula, which helps measure profitability. Since profit and growth reflect a company’s overall financial health, tracking beginning inventory is essential for long-term success.

Beginning Inventory Formulas, Ratios, and Calculations

Beginning inventory doesn’t appear on a company’s balance sheet or income statement, but it is needed for several key business calculations. These calculations help measure performance and track financial health. Some important formulas that use beginning inventory include:

Inventory Turnover

Inventory turnover shows how many times a company sells and replaces its inventory during a specific period. It helps measure how efficiently a business manages its stock and how easily it turns inventory into cash. The turnover rate varies by industry for example, a T-shirt company will sell and restock products much faster than a luxury yacht maker.

To find inventory turnover, you first need to calculate average inventory using this formula:

Average Inventory = (Beginning Inventory + Ending Inventory) / 2

Then, use the average inventory to find the inventory turnover ratio:

Inventory Turnover Ratio = COGS / Average Inventory

A higher turnover ratio usually means the company is selling products quickly, while a lower ratio might suggest overstocking or slow sales. Using the T-shirt company example, the average inventory is $6,000 (($8,000 + $4,000) / 2). We already calculated COGS as $6,000. So, the company’s inventory turnover rate is 1 time during the quarter ($6,000 / $6,000). This means the business sold and replaced its entire inventory once in that three-month period.

Cost of Goods Sold (COGS)

COGS helps a company find its gross profit by subtracting it from total revenue. When COGS is lower, profit is higher, and when COGS is higher, profit is lower. It includes all direct costs used to make or buy products for sale.

Formula:

COGS = (Beginning Inventory + Purchases) – Ending Inventory

Example:

A T-shirt company starts the quarter with $8,000 in inventory.
During the quarter, it buys $2,000 worth of new stock and ends with $4,000 worth of shirts left.

Using the formula:

COGS = $8,000 + $2,000 – $4,000
COGS = $6,000

This means the company spent $6,000 to produce or buy the shirts it sold during that period.

Days in Inventory (DII)

Also called days sales of inventory, DII shows how long it takes a company to sell its inventory. A low number means products sell fast. A high number means sales are slow.

Formula:

DII = (average inventory / COGS) × number of days in that period

Let’s look at our T-shirt company example:

Average inventory = $6,000
COGS = $6,000
Days in the period = 90

So, DII = ($6,000 / $6,000) × 90

DII = 90 days

This means the company takes about 90 days to sell its total inventory.

How to Calculate Beginning Inventory?

Beginning inventory for a new period is the same as the ending inventory from the previous period. For example, if our T-shirt company’s ending inventory for the quarter is $4,000, then its beginning inventory for the next quarter is also $4,000, no calculation needed.

If the company wants to double-check or confirm its beginning inventory for auditing or reconciliation, it can use this formula:

Beginning inventory = (COGS + ending inventory) - cost of inventory purchases

We know:

COGS = $6,000
Ending inventory = $4,000
Purchases = $2,000

So, the beginning inventory is $8,000 ([$6,000 + $4,000] - $2,000). This matches the number we found in the previous section.

Demand forecasting

Past inventory, seasonal patterns, and sales data help a business predict future product demand. This process, known as demand forecasting, allows companies to plan ahead. For example, if a business notices coffee mug sales rise every April, it can stock up in March to meet higher demand and prevent stockouts.

Demand forecasting helps businesses plan how much inventory to keep, when to reorder, and how sales might shift over time. It also helps estimate future sales and revenue. On a larger scale, demand forecasting supports budget planning, production scheduling, storage management, and pricing strategies.

If a company is new or launching a new product with little or no sales history, it can use qualitative forecasting methods. These include market research, customer surveys, competitor analysis, and expert opinions to make predictions.

Advanced forecasting methods use data to identify factors that influence demand. These may include competition, changes in the economy, seasonal effects, consumer behavior, and adjustments in marketing or advertising strategies.

Related Blog:

Demand Planning vs. Supply Planning

How and Where Do Businesses Use Beginning Inventory?

Inventory is a valuable business asset, and beginning inventory plays a key role in accounting. Companies use it in three main areas:

Internal Accounting

Checking inventory at the start of each accounting period helps a business plan for future needs. This can mean increasing or reducing production or reordering supplies. Companies also use beginning inventory data to spot differences between periods and find possible issues. It also helps prevent inventory shrinkage losses caused by damage, expiration, theft, or mistakes from manual counting or weak software.

Tax Documentation

Knowing your beginning inventory helps when something goes wrong, like a fire destroying your warehouse. It shows how much value was lost and helps with tax write-offs or deductions. Even in normal times, it’s important to record beginning inventory because taxes are based on the cost of goods sold (COGS), which includes beginning inventory in the calculation.

Evaluating the Impact of Pricing Changes

When you change your product prices, whether you raise or lower them, it’s important to study how those changes affect sales. This helps you understand how customers respond to price differences and how sensitive they are to them. By analyzing these reactions, you can adjust your pricing strategy to increase profits while keeping customers loyal and satisfied.

Reconciling Inventory Records

Doing a physical count of your inventory and comparing it with your recorded beginning inventory helps find differences, such as losses or mistakes. This process improves the accuracy of your records and helps maintain better inventory control.

Balance Sheets

A balance sheet shows all the assets and liabilities a company has. A strong balance sheet can help a business get loans and build trust with investors. Beginning inventory does not appear directly on the balance sheet because it shows the end of an accounting period. However, it can be figured out from the ending inventory, since both values should match from one period to the next.

Analyzing Inventory Turnover

By comparing your beginning inventory, ending inventory, and sales numbers, you can find your inventory turnover ratio. This ratio shows how quickly you sell and replace products. It helps you see how well you manage your inventory and guides decisions about buying, pricing, and marketing.

Identifying Slow-Moving or Obsolete Inventory

Your beginning inventory changes from one period to another. Tracking these changes helps you find items that stay too long on the shelf. By spotting old or slow-moving products, you can take action such as offering discounts or changing your product selection to prevent losses from outdated inventory.

Related Blog:

When Does Overstock Become Obsolete?

How to Value Inventory?

Beginning inventory is the total value of goods a company has at the start of an accounting period. However, the way inventory is valued can differ depending on the business and what it sells. There are four common methods to calculate this value: first in, first out (FIFO), last in, first out (LIFO), weighted average cost, and specific assigned value. Each method affects financial statements in different ways.

First In, First Out (FIFO)

The FIFO method is the most common way to value inventory. It follows the natural order of sales; the first items bought are the first ones sold. This means the cost of the oldest inventory is used to calculate the cost of goods sold (COGS). FIFO often results in lower COGS and higher profit because older inventory usually costs less than newer stock.

Last In, First Out (LIFO)

The LIFO method assumes that the most recently purchased items are sold first. This means the newest inventory costs are used to calculate the cost of goods sold (COGS). As a result, COGS is usually higher and profits are lower compared to FIFO. However, LIFO can reduce a company’s tax bill and improve cash flow.

Weighted Average Cost

This method finds the average cost of all items in inventory. It’s often used when products are very similar. To calculate it, add the total cost of all goods bought during the accounting period, then divide by the total number of items. This approach helps balance out price changes that happen over time.

Specific Assigned Value

This method is very detailed and is often used for expensive items, such as cars or machinery. Each item is tracked from the time it’s bought until it’s sold. Every product has its own price and is labeled with a serial number or RFID tag. This method gives the most accurate value of inventory.

Streamline Your Inventory Calculations With Dynamic Distributors

Beginning inventory shows why it’s important to know where your business stands before planning ahead. Accurately calculating inventory value at the start of an accounting period helps determine how much revenue can be made in the next one. By studying inventory management trends and changes in inventory over time, businesses can create better budgets, improve forecasts, and prepare for seasonal shifts in demand.

Calculating beginning inventory, COGS, and total inventory value can feel complicated. But Dynamic Distributors makes it simple. This all-in-one inventory management automates tracking, manages raw materials, and boosts operational efficiency.

Ready to take full control of your inventory and gain clear visibility into your finances and operations? Contact Dynamic Distributors, the smart, scalable, and easy-to-use inventory management platform built for growing businesses.

FAQs About Beginning Inventory

Why is beginning inventory useful?

Beginning inventory helps businesses understand their sales and operations better. By measuring and analyzing it, companies can see the value of products they already have and make smarter business decisions. This information also helps prepare for seasonal or recurring changes in sales.

What is included in beginning inventory?

That depends on the business type. For manufacturers, beginning inventory may include raw materials, components, items being made, and finished goods. For retailers, it includes all products that are ready to be sold to customers.

How do you find the beginning inventory cost?

The beginning inventory of a new accounting period is the same as the ending inventory of the previous one. To find it, add the previous period’s COGS and ending inventory, then subtract the cost of purchases made during that period. The final number is the beginning inventory cost for the new accounting period.

What Is Beginning Inventory? Formula & How to Calculate?