Question

All of the following statements regarding inventory shrinkage are true except:

A. Inventory shrinkage refers to the loss of inventory.
B. Inventory shrinkage is determined by comparing a physical count of inventory with recorded inventory amounts.
C. Inventory shrinkage is recognized by debiting Cost of Goods Sold.
D. Inventory shrinkage is recognized by debiting an operating expense.
E. Inventory shrinkage can be caused by theft or deterioration.

Answer 1

Answer:

The incorrect option is D. The inventory shrinkage cannot be recognized by debiting an operating expense.

Explanation: Even though it is correct saying that diminishing inventories will have an impact on the P&L sheet through debiting the records, it is incorrect booking that operation in the expenses. Inventories are affected by cost variations, so the debt must go in Cost of goods sold (option c). The other options are correct since Inventory shrinkage refers to a loss in physical inventory not recognized yet in the accounting (option a and b). This loss can be caused by deterioration or robbery (option e).