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- Definition: Beginning inventory refers to the quantity and value of goods a company has available for sale at the start of an accounting period.
- Components: This includes raw materials, work-in-progress, and finished goods that are ready for sale.
- Importance:
- Serves as the starting point for calculating the Cost of Goods Sold (COGS) for the period.
- Helps in determining the inventory turnover ratio.
- Essential for preparing accurate financial statements.
- Calculation:
- The value is usually carried forward from the ending inventory of the previous period.
- Adjusted for any discrepancies, returns, or damages that may have occurred after the previous period ended.
- Role in Financial Statements:
- Included in the balance sheet under current assets.
- Used in the income statement to compute COGS:
\[ \text{COGS} = \text{Beginning Inventory} + \text{Purchases} – \text{Ending Inventory} \]
- Impact on Business Operations:
- Influences purchasing decisions and production planning.
- Helps in cash flow management by understanding how much capital is tied up in inventory.