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Written By:
Denise Elizabeth P
What is Opening Stock?
Opening Stock, also called Beginning Inventory, refers to the quantity held by a company at the beginning of the accounting period.
Similarly, it is the ending stock of the preceding year and is carried forward to the next year.
In the Balance Sheet, the Opening Stock is classified as a Current Asset although it will not specifically appear in the report.
But what will appear in the Balance Sheet is the ending stock balance since the Balance Sheet is reported at a specific date.
Types of Opening Stock
The inventory that companies carry will depend on their type of business.
A manufacturing company will have different inventory compared to that of a service company.
Whatever type of business a company has, the inventory types can be classified as Raw Materials, Work in Progress, and Finished Goods.
Raw Materials
This type of inventory refers to basic materials that are still unprocessed, and are used to create the finished goods.
Work in Progress
Work in Progress or WIP is typically used by manufacturing companies and refers to products that cannot be considered as Finished Goods yet but have already undergone some processes (modification, conversion, or transformation).
Finished Goods
This inventory type is already completed and is ready to be sold by the company.
The formula for Calculating Opening Stock
There are two methods for calculating opening stock:
Formula # 1 (For Manufacturing Companies):
Opening Stock = Raw Material Cost + Work in Progress Values + Finished Goods Cost
Formula # 2 (When only Closing Stocks, Cost of Goods Sold, Gross Profit and Sales information are provided):
Opening Stock = Sales – Gross Profit – Cost of Goods Sold + Closing Stock
Examples of Opening Stock
Example # 1
Wood Corporation manufactures furniture. On January 1, 2020, they have the following information:
Timber – $300,000
Wood Screw – $25,000
Nails – $11,000
Pre-cut Wood – $150,000
Assembled Furniture – $230,000
Based on the above, the formula that can be used is the first formula provided above.
Furthermore, the given information can be grouped according to Raw Materials, Work in Progress, and Finished Goods.
| Raw Materials | |
| Timber | $300,000.00 |
| Wood Screw | $25,000.00 |
| Nails | $11,000.00 |
| $336,000.00 | |
| Work in Progress | |
| Pre-cut Wood | $150,000.00 |
| Finished Goods | |
| Assembled Furniture | $230,000.00 |
Given the above information, the Opening Stock is therefore computed as:
Opening Stock = $336,000 + $150,000 + $230,000
Opening Stock = $716,000
Example # 2
Wood Corporation has the following details available in their books:
Sales – $750,000
Sales Returns – $30,000
Cost of Goods Sold – $450,000
Total Purchases – $270,000
Closing Stock – $225,000
Using the second formula given, the Opening Stock can be computed based on the below:
Opening Stock = Sales – Purchases – Gross Margin + Closing Stock
Opening Stock = $720,000 – $270,000 – $270,000 + $225,000
Opening Stock = $405,000
Limitations of Opening Stock
A few of the disadvantages posed by Opening Stocks are the following:
Holding Cost
When companies keep a lot of inventory, it increases the expenses related to storage and thus reduces the profitability of the company.
Risk of Obsolescence
When inventories are not sold, it poses a risk of being outdated because market conditions vary.
This means that over time, the inventory could no longer be of any use and will therefore be difficult to sell.
Low Sales
When investors look at companies with very high opening inventory, it sends a message that the business is not fast enough in turning inventories into a sale.
This will not look good on the financial statements of businesses and as such, management must closely look at the behavior of their purchases as opposed to the demands of their product(s).
Important Points
Opening stock must be accurately reported in the books of the company as it is the starting point at which the Cost of Goods Sold is computed.
Businesses must account for all the inventories that go into the production of their products because it directly affects both the Balance Sheet and Income Statement.
Additionally, opening inventories are used in important financial metrics such as the computation of Average Inventories and the Inventory Turnover formula.
Conclusion
Holding inventory is helpful for businesses because it provides them the ability to adjust to the varying demands of their customers.
When demands are high, they must ensure that they have the inventory to back up their production requirements.
At the same time, a company’s management must also be conservative in their purchases because holding a huge amount of inventory without the sales data to back it up might mean negatively to stakeholders, creditors, and investors.
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Sacramento State "Absorption Costing vs. Variable Costing" Page 1 - 11. February 23, 2022
Harper College "Manufacturing Costs" Page 1 - 17. February 23, 2022
