Inventories Inventories are necessary to clearly show income when theproduction, purchase, or sale of merchandise is an income-producingfactor in your business. They are the starting point when figuringcost of goods sold. Include the following items when accounting for your inventory. Merchandise or stock in trade. Raw materials. Work in process. Finished products. Supplies that physically become a part of the item intendedfor sale. You must value your inventory at the beginning and end of eachtax year to determine your cost of goods sold (Schedule C, line 42).To determine the value of your inventory, you need a method foridentifying the items in your inventory and a method forvaluing these items. Inventory valuation rules cannot be the same for all kinds ofbusinesses. The method you use to value your inventory must conform togenerally accepted accounting principles for similar businesses andmust clearly reflect income. Your inventory practices must beconsistent from year to year. For more information about inventories, see Publication 538,Accounting Periods and Methods. Caution: If you must account for an inventory in your business, you must usean accrual method of accounting for your purchases and sales. Seechapter 2.