 # Beginning Inventory Formula

## Beginning Inventory Formula – Definition

Beginning inventory refers to the entire value of a company’s stock at the beginning of the accounting period. It forms a pivotal aspect of inventory accounting.

## Significance of Beginning Inventory Formula in an E-commerce Business

Beginning inventory helps businesses maintain transparency to avoid stockouts. There are several benefits that beginning inventory offers::

• Understanding general trends in the sales of various products of the company
• You can predict the optimum investments that need to be made on new products for the subsequent accounting period. This saves from the risk of unnecessary overstocking and stockouts.
• A higher inventory value would suggest lower sales, and a lower value may either hint at a flaw in the supply chain or better sales. This helps in better decision-making while making investments and helps improve the business model.

## Applications of Beginning Inventory Formula

Beginning inventory formula is crucial in avoiding the ‘dead stock’ risk. Some of the basic applications of the beginning inventory formula are as follows –

• Maintaining balance sheets
• Keeping documentation of the internal accounting
• Bookkeeping
• Maintaining tax documents

## Beginning Inventory Formula

### Beginning Inventory Formula =

(COGS + Ending Inventory) – Purchases

Where,

• COGS = Cost of goods sold

Definition of each Element used in the Beginning Inventory Formula

The beginning inventory formula contains the following elements –

• COGS – Cost of the goods sold in the last accounting tenure.
• Ending inventory – The remaining value of the stocks available at the end of the previous accounting tenure
• Purchases – It is the total value of the new stocks purchased at the start of the current accounting tenure

How to Use the Beginning Inventory Formula To Calculate a Business’ Turnover Ratio?

Here is how you calculate the Beginning Inventory Formula:

• Calculate the Cost of goods sold (COGS) with the help of data from the previous accounting tenure.

### Cost of Goods Sold (COGS) =

(Beginning Inventory + Purchases) – Closing Inventory

• Calculate the ending inventory with the help of data from the previous accounting period.

### Ending Inventory =

(Beginning inventory + Net purchases) – COGS

• Now deduct the total amount of the new inventory purchased from the summation of the above two elements (COGS+Ending Inventory)

Let us assume that you sold 2000 air-conditioners, and the buying cost for each product was A\$700. So our cost of goods sold (COGS) becomes:

Manufacturing price x Quantity

### = COGS

A\$700 x 2,000 = A\$1,400,000

Now let us assume that by the end of the accounting tenure, you are left with 400 air-conditioners. So, the ending inventory would be:

Manufacturing Price x Remaining Quantity

### = Ending Inventory

A\$700 x 400 = A\$280,000

Now suppose you purchase 500 new air-conditioners at the start of the new accounting tenure, the purchase value will be:

Manufacturing Price x Remaining Quantity

### = Purchases

A\$700 x 500 = A\$350,000

Now we have all the necessary data to be able to calculate the beginning inventory employing the formula:

(COGS + Ending Inventory) – Purchases

(A\$1,400,000 + A\$280,000) – A\$350,000 = A\$1,330,000

Hence your beginning inventory is A\$1,330,000 at the beginning of the accounting tenure.

## What Can You Infer from the Result of the Beginning Inventory Formula?

The beginning inventory formula predicts the optimum investment the e-commerce business should make to buy the stocks for the current accounting tenure. 