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 –
- Studying business pattern
- 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.