Beginning inventory Formula & How to Calculate

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If you start out a quarter with more inventory than when you started the previous quarter, is it a good thing or a bad thing?

It could mean you stocked up in preparation for a big sale or rise in demand. Or, it’s an indication that you have more inventory than you can sell.

If you start out with less inventory than the period prior, it could mean you sold a lot of your stock — congratulations! Or, it’s a sign you’re facing issues at some link in your retail supply chain and don’t have enough stock available.

Inventory fluctuations happen for different reasons and are very normal. That’s why calculating your beginning inventory is so important for financial stability, demand forecasting, inventory calculations, updating your balance sheets, and much more.

Let’s jump into what beginning inventory is and how to easily calculate it.

What would you like to learn?

What is beginning inventory?

Beginning inventory is the value of inventory a business has in stock at the beginning of a new accounting period.  Beginning inventory should equal the same amount as the ending inventory from the prior accounting period.

The importance of knowing your beginning inventory

First and foremost, transparency. It tells you how much inventory you have to work with, and how much inventory you need to order to avoid stockouts. Beginning inventory can also be used to calculate how much merchandise was sold during a given period.

By understanding how much inventory you have at the beginning of an accounting period, you can make smarter purchasing decisions based on your forecasted demand for the remainder of that period.

It is also important for identifying inventory at risk of becoming “dead stock”, by keeping track of the inventory that’s at risk of being no longer sellable.

How to value inventory

Choosing the right inventory valuation method for your ending and beginning inventory is crucial for maintaining a financially strong balance sheet. There are multiple valuation methods that can be used depending on business size and needs. Here are 4 inventory valuation methods.

1. Weighted average cost (WAC)  

Also known as the average cost method, this method of valuation is good for businesses who ship packages of similar sizes. The formula is as follows:

Cost of goods available for sale / Total units in inventory

2. Specific identification method

This tends to be the most accurate method since every single item is tracked individually. This method is best for businesses with products that vary greatly in size and value. There is no formula for this method, all you need to do is tag each and every item with its purchase value and incurred value until it is sold. 

3. First-in first-out (FIFO)

FIFO is a commonly used valuation method since it is simple to use. As the name implies, inventory that is produced first will seemingly be sold first. With this method you can calculate value based on the inventory you have on hand. 

4. Last-in first-out (LIFO)

LIFO is less common and not the most practical since most businesses wouldn’t want to sell their newest products first. However, there are tax advantages. The end result of LIFO means higher COGS and lower balance of remaining inventory, which means less taxes, which means more cash flow.

Where you’ll use beginning inventory

Beginning inventory is an important aspect of inventory accounting that you’ll need to use at the start of an accounting period in the following areas. It is important to note that beginning inventory is considered a current asset. 

Balance sheets

Balance sheets are an important indication of financial health, as they improve your chances of qualifying for bank loans and also increase your investors’ and partners’ confidence in your business. Inventory is often the largest asset an ecommerce business has, and beginning inventory is the amount documented when a new accounting period starts.

Internal accounting documents

Beginning inventory provides insight into the valuation of your stock, which is useful for internal accounting documents such as income statements. It helps with ecommerce bookkeeping in the following ways:

Tax documents

Knowing your beginning inventory helps determine the tax deductions from your stock. Having too large of a beginning inventory, or one that’s too small, can be detrimental for your taxes.

For example, a large amount of ecommerce inventory won’t help you save on taxes because the tax deduction is only applicable after the goods are sold or deemed worthless and disposed of. Also, storing great amounts of inventory and/or many SKUs will raise your ecommerce warehousing costs.

Whether you’re using a perpetual inventory system or the periodic inventory method, the following supporting formulas often coincide with calculating the beginning inventory of an accounting period.

COGS

To calculate the cost of goods sold at the end of an accounting period, you can use the records from your previous accounting period.

Cost of Goods Sold (COGS) = (Beginning Inventory + Purchases) – Closing Inventory

Ending inventory from prior financial period

Your accounting records from the prior financial period help you determine where you left off. In other words, your ending inventory from Q3 is your beginning inventory in Q4.

If this is your first time calculating ending inventory, you will need to determine how much new stock was purchased and sold in a period of time.

Ending Inventory = Beginning Inventory + Net Purchases – COGS

Note: Choosing the right inventory valuation method for your ending and beginning inventory is crucial for maintaining a financially strong balance sheet. Inventory can be valued using methods such as LIFO (last-in first-out), FIFO (first-in first-out), and even inventory weighted average.

How to calculate beginning inventory

Calculating beginning inventory using beginning inventory formula. The formula for calculating beginning inventory is:

Beginning Inventory Formula = (COGS + Ending Inventory) – Purchases

1. Calculating your beginning inventory can be done in four easy steps:Determine the cost of goods sold (COGS) with the help of your previous accounting period’s records. 

To calculate the cost of goods sold at the end of an accounting period, you can use the records from your previous accounting period.

Cost of Goods Sold (COGS) = (Beginning Inventory + Purchases) – Closing Inventory

2. Next, multiply your ending inventory balance with how much it costs to produce each item, and do that same with the amount of new inventory.

3. Calculate the ending inventory and cost of goods sold.

Ending Inventory = Beginning Inventory + Net Purchases – COGS

4. Finally, subtract the amount of inventory purchased from your result, and you’ll get your beginning inventory.

The easiest way to understand this formula is by walking through an example.

Let’s say you sold 1,000 refrigerators during the last accounting period, and you purchased each one for $500 from the supplier. The cost of goods sold is:

Manufacturing Price x Quantity = COGS

$500 x 1,000 = $500,000

Now, let’s say at the end of the period, you have 500 refrigerators left. This means the ending inventory is worth:

Manufacturing Price x Remaining Quantity = Ending Inventory

$500 x 500 = $250,000

Furthermore, if your business produced or purchased an additional 700 refrigerators in the new year, the cost of the new inventory is:

Manufacturing Price x Quantity = Purchases

$500 x 700 = $350,000

Thus, we can now calculate beginning inventory using the formula:

(COGS + Ending Inventory) – Purchases

($500,000 + $250,000) – $350,000 = $400,000

This means the beginning inventory is $400,000 at the start of the accounting period.

How to find beginning inventory when using multiple warehouses

Large businesses that are shipping a high volume of orders across regions often grow out of centralized inventory, and opt instead for a ‘distributed’ inventory system — in which inventory is divided up and stored in a number of fulfillment centers in various locations. This can help speed up the order delivery process and save on shipping costs.

The good news is that using multiple warehouses doesn’t have to make finding the beginning inventory in each tricky. With a tech-enabled third-party logistics (3PL) company like ShipBob, you can log in to your inventory management system and access real-time inventory counts.

ShipBob’s software fully integrates with your other business systems and gives you direct insight into warehousing and specific information down to the SKU and unit level, from one central dashboard.

You can view not only the beginning inventory numbers and inventory days on hand but inventory forecasting tools, insights into managing inventory turnover, and much more.

“We have access to live inventory management, knowing exactly how many units we have with ShipBob in each warehouse. It not only helps with our overall process in managing and making sure our inventory levels are balanced but also for tax purposes at the end of the year. ShipBob made that entire process very simplified for our accountants and us.”

Matt Dryfhout, Founder & CEO of BAKblade

Conclusion

Determining your beginning inventory at the end of each accounting period can be time-consuming if you don’t have a good system for tracking inventory in place.

With ShipBob, you can compute your beginning inventory in no time, without requiring staff to perform an inventory audit or a physical count of the products. ShipBob not only stores products and picks, packs, and kits orders for you, but our inventory management software monitors inventory levels across multiple warehouses, making it an easy choice for fast-growing ecommerce businesses.

View historical inventory levels by changing filters to the date range of your choice, filter down to the product or lot level, view status by channel sold on, and more.

inventory summary and turnover from ShipBob's analytics tool

“I felt like I couldn’t grow until I moved to ShipBob. Our old 3PL was slowing us down. Now I am encouraged to sell more with them. My CPA even said to me, ‘Thank God you switched to ShipBob.’ ShipBob provides me clarity and insight to help me make business decisions when I need it, along with responsive customer support.”

Courtney Lee, founder of Prymal

Click the button below to learn more about how ShipBob makes inventory management and order fulfillment even easier for your ecommerce business.

What is opening/closing inventory?

Opening inventory, also known as beginning inventory, is the value of inventory that is carried forward from the previous accounting period and is used to compute the average inventory. It also helps to determine cost of goods sold. Closing inventory (also known as ending inventory) is the value of the stock at the end of the accounting period.

What counts as purchases?

In the context of inventory, purchases include raw materials bought for production (also called production inventory), finished goods inventory bought from a supplier, and any equipment acquired throughout the manufacturing process.

How do I calculate COGS?

You can calculate the cost of goods sold from the records documented during your previous accounting period. To calculate this, add the beginning inventory value to purchases during the period, and then subtract the ending inventory from this sum. The result is the cost of goods sold (COGS).

Written By:

Kristina is the Director of Marketing Communications at ShipBob, where she writes various articles, case studies, and other resources to help ecommerce brands grow their business.

Read all posts written by Kristina Lopienski