First, understand that your Beginning of Year (BOY) Inventory must match your prior years End of Year (EOY) inventory. Therefore, in your first year the BOY must be zero. It doesn't matter when you actually purchased that inventory. It could have been years before you even started the business. But it's the only way possible to have your BOY inventory for the current year, match your EOY inventory of the prior year.
BOY Inventory - What "you" paid for the inventory in your possession on Jan 1 of the tax year. In the first year the balance must be $0. It doesn't matter when that inventory was purchased.
EOY Inventory - What "you paid for the inventory in your possession on Dec 31 of the tax year. Again, it doesn't matter when this inventory was purchased either.
COGS (Cost of Goods Sold) - What "you" paid for the inventory you actually sold during the tax year. Again, it doesn't matter when this inventory was purchased either.
So here's a 2-year scenario.
Year 1
BOY Inventory - $0 (Matches prior year EOY inventory since you reported no EOY inventory the prior year)
EOY Inventory - $1000 (unsold inventory you had on Dec 31 of the tax year)
COGS - $500 (what you paid for the inventory you actually sold during the tax year)
The above indicates you had/obtained a total of $1500 of inventory during the tax year. You sold $500 of that inventory, leaving you with $1000 of inventory on Dec 31 of the tax year. The $500 sold is deducted from the taxable business income for that first year.
Year 2
BOY Inventory - $1000 (Matches your prior year EOY inventory, as is required)
EOY Inventory - $2000 (self explanatory)
COGS - $5000
The above shows that you started the year with $1000 of inventory. Then during the year you purchased an additional $6000 of inventory, bringing the total inventory for the 2nd year to $7000.
Of that $7000 of inventory you possessed at some point during the 2nd year, you sold $5000 of that inventory during that 2nd tax year, leaving you $2000 of inventory remaining on Dec 31 of that 2nd tax year. The $5000 of inventory that you sold will be deducted from the taxable business income for that 2nd tax year.
