Prepare inventory records as an evidence file, not just a spreadsheet. Start with a dated item-level listing that reconciles to the general ledger, then document how quantities were counted, how costs were assigned, and which goods the business actually owns. Separate owned, consigned, customer-owned, in-transit, and warehouse-held stock. Add aging, damaged or obsolete items, reserve calculations, purchase and sales cutoff support, and explanations for unusual movements. The right accounting treatment depends on the reporting and tax framework used by the business, so have your accountant confirm it before sharing the file. Buyers can then test quantity, cost, condition, and rights without guessing how the balance was assembled.
Start with a dated inventory master
Build one controlled listing for the proposed review date. At minimum, include SKU or part number, description, location, quantity, unit of measure, unit cost, extended cost, status, and the source record used. For manufactured goods, identify raw materials, work in process, and finished goods separately. The IRS describes those categories as inventory components for taxpayers that use inventory accounting [1].
Tie the listing to the general ledger inventory balance and explain every reconciling item. A useful bridge shows the ledger balance, the count result, goods in transit, approved adjustments, reserve or write-down entries, and the final schedule total. Keep the prior period listing and the reconciliation so a reviewer can distinguish a real movement from a reclassification or correction.
Make the physical count repeatable
Write a short count instruction before counting begins. Define the count date, locations, team roles, unit conventions, treatment of damaged goods, and how duplicate or missing tags will be handled. Freeze or log receipts, shipments, production moves, and returns during the count window. Record the first and last count-sheet or tag numbers so gaps can be investigated.
Retain signed or electronically attributable count sheets, recounts, exception logs, photographs where useful, and the final adjustment report. PCAOB inventory guidance describes observation, tests, inquiries, and inspection of count records as relevant procedures when quantities depend on a physical count [3]. You are not creating an audit merely by keeping these records, but the same discipline makes buyer testing easier.
Reconcile quantities and cutoff
Test the listing in both directions. Select items from the listing and locate them on the floor, then select items from each location and confirm that they appear in the listing. Investigate negative quantities, duplicate SKUs, units that do not match purchasing records, and large manual adjustments. Explain whether a count difference was corrected in the books or remains an unresolved exception.
Create a cutoff packet around the count date. Link the last and first relevant receiving reports, bills of lading, purchase invoices, sales invoices, shipping documents, returns, and production records. State how goods shipped but not yet delivered, and goods received but not yet invoiced, were treated. The goal is to show that the balance belongs to the date being presented, not merely that a later spreadsheet adds up.
Explain the costing method
Document the method used for each material inventory class and show a sample calculation from source invoice or production record to the listing. Depending on the applicable framework, the method may involve specific identification, FIFO, weighted average, LIFO, a retail method, or another permitted approach. The IRS explains specific identification, FIFO, and LIFO for tax inventory purposes, while IAS 2 uses specific identification for non-interchangeable items and FIFO or weighted average for ordinarily interchangeable items [1] [2]. These are not interchangeable rules, so your accountant should identify the framework that governs your records.
For manufactured inventory, map direct materials, labor, and production overhead into the cost build-up and identify any standard-cost variances. For purchased goods, preserve invoice, freight, duty, rebate, and discount logic. Do not switch methods simply to make inventory appear more attractive before a sale. If a method change or correction is being considered, document the reason, approval, period affected, and accounting or tax consequences with a qualified professional.
Separate ownership and custody
Add an ownership field and supporting document for goods that are not straightforwardly owned. Separate company-owned stock from goods held on consignment, customer-owned material, vendor-owned stock, goods in third-party warehouses, goods pledged as collateral, and goods in transit. The IRS guidance illustrates why title and consignment status matter: goods consigned to the business are treated differently from goods the business owns and has placed with a consignee [1]. The governing contract and applicable law may produce a different result, so do not rely on a label alone.
For third-party locations, retain warehouse statements, confirmations, warehouse receipts, custody agreements, and any lien or borrowing-base documentation. For consigned goods, retain the agreement, owner, settlement terms, and inventory movement report. For customer-owned or supplied material, identify why it is present and how it is excluded from the company’s balance. A clear rights schedule prevents a quantity that exists physically from being mistaken for an asset the seller can transfer.
Age stock and support reserves
Prepare an aging report by SKU and location using a defined date, such as last receipt, last production use, or last sale. Explain which date is used and why. Flag slow-moving, discontinued, superseded, damaged, returned, incomplete, and excess items. Link each flag to evidence such as customer orders, backlog, recent sales, supplier return rights, repair or rework plans, markdown history, or disposal records.
Then show the reserve or write-down logic by category. Do not bury an adjustment in a single unexplained percentage. State the quantity affected, recorded cost, expected recovery or disposal proceeds, selling or completion costs considered, and the approval or review date. IAS 2 describes measurement at the lower of cost and net realisable value and defines that value using estimated selling price less completion and selling costs [2]. U.S. tax treatment has its own rules, including treatment for goods that cannot be sold at normal prices [1]. Present the framework used and have the responsible accountant confirm the conclusion.
Create a buyer-ready evidence index
Organize the file so each important number has a path to evidence. An index can point from the inventory listing to count sheets, location maps, receiving and shipping cutoff documents, invoices, production cost reports, aging, reserve calculations, ownership contracts, warehouse confirmations, and ledger exports. Use stable filenames, dates, and version control. Keep an exception log with owner, status, proposed resolution, and the document that closes the issue.
Review the source data before sharing it. PCAOB evidence guidance says company-produced information should be evaluated for accuracy, completeness, and sufficient precision, and it identifies existence, completeness, valuation, rights and obligations, and presentation or disclosure as distinct assertions [4]. Those categories are a useful review lens even when no audit is required. Restrict access to the people who need it, remove unrelated personal or confidential information, and ask counsel or the deal team how sensitive material should be staged.
Set a human review and refresh process
Assign one accountable owner for quantities, one for costing, and one for ownership and reserve judgments, even if a small team combines roles. A spreadsheet formula, script, or AI tool may help normalize SKUs, identify duplicate rows, compare periods, or draft an exception list. It should not decide ownership, approve a reserve, change a cost method, or disclose records. The reviewer must trace each suggested issue back to the source-of-truth record and record the decision.
Pilot any automated assistance on a non-sensitive copy or a limited set of SKUs. Stop the pilot if identifiers are altered, units are silently converted, source links are lost, or reviewers cannot reproduce the result. Before release, reconcile totals again, inspect high-value and unusual items, confirm permissions, and obtain human sign-off. Refresh the listing and cutoff support when the count date, letter of intent process, or closing timetable makes the earlier snapshot stale.
Use the records to explain the deal balance
Inventory is often discussed as a single working-capital number, but a buyer may need to understand what can be sold, what is usable, what is owned, and what may require a reserve. Prepare a short narrative that explains material changes by category, the treatment of consignment and third-party stock, unusual purchases or builds, and open exceptions. Keep factual explanation separate from negotiation positions. A qualified adviser can help determine how the records feed into the purchase agreement, tax reporting, or closing statement for the specific transaction and jurisdiction.
Acquivo gives business owners the entire sell-side process an investment bank would run, as software, with no success fee. It is user-operated software, so the owner and selected advisers remain responsible for source checks, permissions, judgments, and approvals. Acquivo is a software platform that delivers the entire sell-side M&A process, valuation, marketing materials, buyer matching, and deal management, on one platform for business owners, M&A attorneys, and boutique investment banks.
Key Points
- Build a dated item-level listing and reconcile it to the general ledger with a documented bridge.
- Retain repeatable count instructions, count evidence, cutoff support, and an exception log.
- Document the costing method and source calculations, with accountant review for the applicable framework.
- Separate owned, consigned, customer-owned, in-transit, warehouse-held, and pledged goods.
- Age inventory and show evidence-based reserve or write-down logic for damaged, obsolete, or slow-moving stock.
Sources and references
Source retrieval dates record research access, not article publication. Read our editorial and date policy.
- [1] Publication 538, Accounting Periods and Methods · Accessed
- [2] IAS 2 Inventories · Accessed
- [3] AS 2510: Auditing Inventories · Accessed
- [4] AS 1105: Audit Evidence · Accessed
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Educational information, not individual legal, tax, or investment advice. Consult qualified professionals for your circumstances. Acquivo provides software, not representation or negotiation on your behalf.