Calculating Beginning Inventory: Formula & Explanation

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  • 0:00 Definition of…
  • 0:32 Using Beginning Inventory
  • 1:21 Formula for Beginning…
  • 2:14 Formula Example
  • 3:34 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

One of the most important assets a company must protect and control is inventory. In this lesson, you'll learn how to calculate beginning inventory, which is the first step of accounting for inventory changes during an accounting period.

Definition of Beginning Inventory

Beginning inventory is the dollar value of all inventory held by an organization at the beginning of an accounting period. That inventory can be anything - whatever it is the company sells. If we are talking about a large electronics store, then the dollar value of TVs, computers, and whatever else they have can be considered inventory. For a grocery store, inventory is the total of the apples, cherries, peaches, and all other food.

Using Beginning Inventory

Each accounting period, managers and investors rely on financial statements to give them valuable information about the health and strength of the business. One of the considerations they are very interested in is any change in inventory levels.

Decreasing inventory may be an indicator that sales are accelerating, but it could also suggest issues with the supply chain. Increasing inventory could happen when companies are preparing for a busy season, but it could also mean the company is producing more than it is selling. Whatever the cause, changes in inventory levels are often an early indicator that something is changing in the business environment.

To calculate the change in inventory, there are four variables that must be known: ending inventory, additions to inventory, inventory sold/used, and beginning inventory.

Formula for Beginning Inventory

Technically speaking, beginning inventory should always be the same as the ending inventory from the previous accounting period. While this is true, there are two reasons that the formula for beginning inventory shouldn't just plug in the last period's ending inventory.

First, there isn't always a 'last accounting period.' At some point, beginning inventory has to be calculated independent of the previous accounting period. Second, and more importantly, if ending inventory is miscalculated at some point, and then it is used as beginning inventory, the error won't be caught and if it is, it would be very difficult to identify why and when it happened.

The formula for calculating beginning inventory without considering the previous accounting period looks like this:

Ending Inventory + Sales - Inventory (added to stock) = Beginning Inventory

Formula Example

Okay, let's try out the formula. It's the beginning of the accounting period, and as the financial reporting manager you are responsible for calculating the inventory numbers for Fancy Freddie's Car Lot. Since you sell cars, the value of each car in your inventory is pretty accurate, and it's pretty easy to know what inventory you have. Right now, you have $1.2 million in inventory sitting on your lot.

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