Count your current (ending) inventory levels and the corresponding value of the inventory. Record this information in a spreadsheet or other inventory management program for future reference.
Carry your previous closing inventory from the end of the previous year to the first line of Schedule A on Form 1120 ("Inventory at beginning of year"). If you did not have an inventory in the previous year, enter zero.
Enter purchases and costs associated with inventory on lines 2 through 5. Purchases are new additions to the inventory. Costs include warehousing, processing and handling the inventory as well as administrative expenses.
Add up lines 1 through 5 and enter the total on Line 6 of Schedule A 1120.
Enter the ending inventory on Line 7 ("Inventory at end of year") which you determined in Step 1. When you take the total amount on Line 6 less the figure on Line 7, this gives you the cost of goods sold. You can then enter that amount on Line 8 of Schedule A and transfer the result to Page 1, Line 2 of Form 1120.
Check the inventory valuation method you used on Line 9a. The two most common methods of determining the value of inventory are by either looking at the cost to purchase the items or the market value of the inventory, whichever is lower.
Check off the remaining questions for lines 9b through 9f, if they apply. The questions ask whether you wrote down any unacceptable goods, the inventory method, any changes in how you make inventory determinations and whether Section 263A rules apply. Section 263A regulations refer to special corporate accounting methods.