Blog · Finance metrics and formulas · Finance and FP&A teams
Reconcile revenue, earnings adjustments and operating working capital to seller-provided records. Follow a worked example and spreadsheet checks that turn unexplained differences into specific questions for the deal team.
Due diligence financial analysis tests revenue, earnings adjustments and working-capital movements against the records supplied for a proposed deal. Begin with reconciliations, then explain the changes and record what remains unproven. A spreadsheet that adds up is a useful starting point; it does not establish that the information is complete.
Agree which entities, locations, accounts and historical periods are included. Ask for monthly records that cover a full operating cycle and identify acquisitions, closures or accounting-policy changes that affect comparability. Keep source filenames and extraction dates with the analysis.
Use a request register rather than treating missing records as zero:
| File | Fields needed | First check |
|---|---|---|
| Trial balance and statements | Entity, period, account, amount | Statements tie to mapped ledger totals |
| Sales and credit-note registers | Customer, document, date, net amount | Net sales tie to revenue |
| Receivables aging | Customer, invoice, due date, open balance | Closing balance ties to the ledger |
| Inventory and payables exports | Item or supplier, date, balance | Detail ties to balance-sheet accounts |
| Adjustment schedule | Entry reference, period, reason, amount | Each claim traces to evidence |
The SEC's financial-statement guide distinguishes balance-sheet positions at a date from income and cash flows over a period. Preserve that distinction when matching records: annual revenue must not be compared with an aging report from an unrelated date.
For transaction-specific handover requirements, the insurance agency acquisition data checklist covers that narrower business context. Keep the general analysis here focused on the financial evidence supplied.
An illustrative US distributor supplies the following closed-year results. All amounts are USD, and the account classifications are consistent across both years. These are historical records, not a forecast.
| Statement line | 2024 (USD) | 2025 (USD) | Change (USD) |
|---|---|---|---|
| Net revenue | 2,400,000 | 2,700,000 | 300,000 |
| Cost of goods sold | 1,440,000 | 1,755,000 | 315,000 |
| Gross profit | 960,000 | 945,000 | -15,000 |
| Operating expenses | 660,000 | 720,000 | 60,000 |
| Operating profit | 300,000 | 225,000 | -75,000 |
With headers in row 1, labels in A, 2024 in B and 2025 in C, enter the following formulas for 2025 gross profit and operating profit:
=C2-C3
=C4-C5
Revenue growth is =C2/B2-1, or 12.5%. Gross margin moves from 960,000 / 2,400,000 = 40.0% to 945,000 / 2,700,000 = 35.0%, a decline of 5.0 percentage points. Percentages are rounded to one decimal place.
The finding is that higher sales did not produce higher gross profit. Break the sales and cost registers down by month, product and customer to ask whether price, purchasing cost, returns or sales mix explains the difference. Do not attribute the decline to a cause before checking its rows. The gross profit margin guide owns the detailed margin calculation and classification checks.
For the broader statement-comparison context, see financial statement analysis in mergers and acquisitions. This checklist goes further into tracing proposed adjustments and balance movements.
The seller proposes adding back a facility relocation expense and recruiting fees. Present each item separately instead of replacing the reported operating-profit line.
| Earnings bridge | Seller presentation (USD) | Relocation-only scenario (USD) |
|---|---|---|
| Reported operating profit | 225,000 | 225,000 |
| Facility relocation expense | 35,000 | 35,000 |
| Recruiting fees | 20,000 | 0 |
| Arithmetic result after listed adjustments | 280,000 | 260,000 |
The relocation entry traces to invoices and ledger postings for a completed move. The alternate scenario displays that expense separately, subject to review of future facility requirements. Recruiting fees remain in that scenario because the hiring plan indicates continued recruitment. Neither calculation is a finding that future earnings will equal the displayed amount.
If the bridge starts at A1, use =SUM(B2:B4) for the seller column and =SUM(C2:C4) for the alternate column. Keep documents and unresolved questions next to each adjustment.
Although written for public-company disclosure, the SEC's non-GAAP guidance gives a useful analytical warning: excluding normal recurring cash operating costs or changing adjustments inconsistently across periods can mislead. Do not assume that an expense disappears just because the seller calls it unusual.
Define the measure before calculating it. Here operating working capital means trade receivables plus inventory minus trade payables. It excludes cash, debt, taxes and other balances; it is not a contractual transaction definition or a proposed closing target.
| Component | December 31, 2024 (USD) | December 31, 2025 (USD) | Change (USD) |
|---|---|---|---|
| Trade receivables | 360,000 | 510,000 | 150,000 |
| Inventory | 240,000 | 300,000 | 60,000 |
| Trade payables | 180,000 | 210,000 | 30,000 |
| Operating working capital | 420,000 | 600,000 | 180,000 |
The change is 150,000 + 60,000 - 30,000 = $180,000 tied up in the defined balances. For this table in A1:D5, the 2025 formula is =C2+C3-C4. The change is =C5-B5.
Now prove the receivables movement. All sales in this example are on credit; the sales register separates gross invoices from credits.
| Receivables rollforward | Amount (USD) |
|---|---|
| Opening trade receivables | 360,000 |
| Gross credit invoices | 2,710,000 |
| Customer cash receipts applied | -2,550,000 |
| Credit notes | -10,000 |
| Calculated closing receivables | 510,000 |
| Closing ledger and aging balance | 510,000 |
| Unexplained difference | 0 |
Gross invoices less credit notes equal the $2,700,000 of net revenue above. The receivables rollforward equals the closing ledger and aging total. Investigate late customer payments and subsequent collections next; the reconciliation alone does not establish collectibility. Use the working-capital guide for broader interpretation of the balances.
Keep a question log with the observed difference, evidence requested, responsible person and current status. Feed confirmed findings and open items into the financial due diligence report; that report is a separate deliverable. This analysis does not supply legal assurance, a valuation opinion or an automated quality-of-earnings conclusion.
Upload the seller-provided financial workbook and supporting exports for Covirage to map the columns and its tools to compute and check the figures. The external AI model explains the results with every figure traced to its rows, while the deal team resolves missing evidence and adjustment judgments. Create a free Covirage account, then set up your business and bring a sample of your own data.
See the supporting approach for analysis from your own files.
Start with monthly financial statements and trial balances, sales and credit-note registers, receivables and payables aging, inventory records and cash reconciliations. Request supporting documents for material adjustments. The exact scope depends on the business and transaction, so record missing files and periods explicitly.
Trace each proposed adjustment to ledger entries and supporting documents, confirm its period and ask whether the underlying cost or benefit could recur. Show reported results and each adjustment separately. A documented historical expense does not by itself establish that future operations will avoid it.
No. Reconciliations and trend checks identify evidence, inconsistencies and follow-up questions within the supplied records. They do not provide legal assurance, an audit opinion or a valuation conclusion. Missing documentation and specialist matters remain open for the people responsible for the transaction.