How to Find Beginning Merchandise Inventory

Beginning merchandise inventory represents the value of goods a business has available for sale at the start of an accounting period. This figure is a current asset reported on a company’s balance sheet, reflecting items expected to be sold within one year. It is a foundational element in calculating a business’s Cost of Goods Sold (COGS), a direct expense tied to revenue generation. An accurate beginning inventory figure is essential for understanding a company’s profitability and financial health.

Merchandise inventory includes the purchase price of goods and associated costs like transportation and insurance, making it a comprehensive valuation of ready-to-sell products. This balance helps businesses track the flow of goods and measure the true cost of items sold during a period.

Locating the Figure Directly

The most direct way to find the beginning merchandise inventory for a current accounting period is to refer to the financial statements from the immediately preceding period. The ending merchandise inventory balance from the prior period automatically becomes the beginning merchandise inventory for the current period.

Businesses report their inventory balances on the balance sheet, which presents a snapshot of assets, liabilities, and equity at a specific point in time. For example, the ending inventory from the balance sheet of December 31st of the previous year will be the beginning inventory for January 1st of the current year. This figure also often appears within the cost of goods sold calculation on the income statement, serving as the starting component for that formula. Accurate record-keeping is important for this method.

Calculating Through the Cost of Goods Sold Formula

When the beginning inventory figure is not immediately available, it can be calculated using the Cost of Goods Sold (COGS) formula. The standard COGS formula is: Beginning Inventory + Purchases – Ending Inventory = Cost of Goods Sold. This formula considers the goods available at the start of the period, additions made through purchases, and what remains unsold at the end.

To solve for beginning inventory, this formula can be rearranged: Beginning Inventory = Cost of Goods Sold + Ending Inventory – Purchases. “Purchases” refers to the net cost of merchandise acquired during the accounting period, including any transportation costs to bring the goods to the business.

For example, if a business had a Cost of Goods Sold of $150,000 for a period, ending inventory of $40,000, and purchases totaling $100,000, the beginning inventory would be calculated as: Beginning Inventory = $150,000 (COGS) + $40,000 (Ending Inventory) – $100,000 (Purchases) = $90,000.

Impact of Inventory Accounting Methods

The inventory accounting method a business employs influences how beginning merchandise inventory is established and tracked, with physical counts playing an important role. Businesses primarily use either the periodic or perpetual inventory system. Each system impacts the timing and method of recording inventory changes and the determination of beginning inventory.

Under the periodic inventory system, inventory records are updated at specific intervals, often at the end of an accounting period. For this system, the beginning inventory is explicitly used in the COGS calculation, and its accuracy relies on a precise physical count performed at the end of the prior period. Any discrepancies or shrinkage are only identified when the physical count occurs, impacting the accuracy of the beginning inventory figure.

In contrast, the perpetual inventory system maintains continuous, real-time updates of inventory balances. With each purchase and sale, the inventory account is immediately adjusted, meaning the beginning inventory is the balance shown in the inventory account at the start of the period. While perpetual systems offer immediate insight into inventory levels and COGS, physical counts remain necessary for reconciliation and verifying the accuracy of these continuous records. These counts help identify issues like theft, damage, or record-keeping errors, ensuring the recorded beginning inventory aligns with actual stock.