How much inventory did a business purchase within an accounting period? The information is useful for estimating the amount of cash needed to fund ongoing working capital requirements. You can calculate this amount with the following information:
- Total valuation of beginning inventory. This information appears on the balance sheet of the immediately preceding accounting period.
- Total valuation of ending inventory. This information appears on the balance sheet of the accounting period for which purchases are being measured.
- Cost of goods sold. This information appears on the income statement of the accounting period for which purchases are being measured.
The calculation of inventory purchases is:
(Ending inventory - Beginning inventory) + Cost of goods sold = Inventory purchases
Thus, the steps needed to derive the amount of inventory purchases are:
- Obtain the total valuation of beginning inventory, ending inventory, and the cost of goods sold.
- Subtract beginning inventory from ending inventory.
- Add the cost of goods sold to the difference between the ending and beginning inventories.
This calculation does not work well for the manufacturing sector, since the cost of goods sold can be comprised of items other than merchandise, such as direct labor. These other components of the cost of goods make it more difficult to discern the amount of inventory purchases.
An additional problem with the calculation is that it assumes an accurate inventory count at the end of each reporting period. If there was no physical count, or if the record keeping for a perpetual inventory system is not accurate, then the inputs used for the calculation of inventory purchases are not necessarily correct.
Example of Inventory Purchases
ABC International has beginning inventory of $500,000, ending inventory of $350,000, and cost of goods sold of $600,000. Therefore, the amount of its inventory purchases during the period is calculated as:
($350,000 Ending inventory - $500,000 Beginning inventory) + $600,000 Cost of goods sold
= $450,000 Inventory purchases
The amount of purchases is less than the cost of goods sold, since there was a net drawdown in inventory levels during the period.