← The Ultimate Guide to Inventory Accuracy

Preparing for a Financial Audit: Inventory Valuation Tips

For many companies, the most stressful time of year isn't the busy season, it’s the financial audit. Certified Public Accountants (CPAs) and tax authorities require proof that the "Inventory Asset" listed on your balance sheet actually exists and is valued correctly. If your physical count is sloppy, your entire financial statement can be called into question, leading to delays in bank loans or even tax penalties.

Choosing Your Valuation Method: FIFO vs. LIFO

How you value your stock matters as much as how many units you have. The two primary methods are:

• FIFO (First-In, First-Out): Assumes the oldest inventory is sold first. This is common for perishables and is generally preferred by auditors as it mirrors the actual flow of goods.
• LIFO (Last-In, First-Out): Assumes the newest stock is sold first. In times of inflation, LIFO can lower your taxable income, but it requires much more rigorous record-keeping.

The "Lower of Cost or Market" (LCM) Rule

Auditors look for the LCM rule. If you bought an item for $10, but its current market value has dropped to $7 (perhaps due to obsolescence), you must record the loss. A professional inventory count helps identify these "damaged" or "obsolete" items so your valuation remains compliant with Generally Accepted Accounting Principles (GAAP).

How a Professional Count Satisfies Auditors

CPAs love third-party inventory reports. Why? Because an external service is an independent, objective party. When you use an internal team, auditors often have to perform "test counts" to verify your work. When you use a professional service, the auditor can often rely on the service’s internal controls and certification, significantly speeding up the audit process and reducing your accounting fees.

Creating a Documentation Trail

An audit isn't just about the final number; it’s about the "trail." A professional service provides the raw scan data, the zone maps, and the signature logs for every area counted. This level of documentation is the ultimate insurance policy against financial discrepancies.