Table of contents

1. Introduction to Accounting1h 21m
2. Transaction Analysis1h 13m
3. Accrual Accounting Concepts2h 38m
4. Merchandising Operations2h 30m
5. Inventory1h 55m
6. Internal Controls and Reporting Cash1h 16m
7. Receivables and Investments3h 8m
8. Long Lived Assets5h 1m
9. Current Liabilities2h 19m
10. Time Value of Money1h 23m
- Time Value of Money Equations
  35m
- Using Time Value of Money Tables
  47m
11. Long Term Liabilities2h 45m
12. Stockholders' Equity2h 15m
13. Statement of Cash Flows2h 24m
14. Financial Statement Analysis5h 25m
15. GAAP vs IFRS56m

5. Inventory

Inventory Errors

Financial Accounting

5. Inventory

Inventory Errors

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Multiple Choice

Which of the following statements is correct regarding inventory shrinkage?

Inventory shrinkage is recorded as an increase in inventory on the balance sheet.

Inventory shrinkage occurs when the physical count of inventory is less than the amount recorded in the accounting records.

Inventory shrinkage is typically caused by recording errors that increase the book value of inventory.

Inventory shrinkage results in an overstatement of net income if not adjusted.

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Verified step by step guidance

Understand the concept of inventory shrinkage: Inventory shrinkage refers to the loss of inventory due to theft, damage, miscounting, or other factors, resulting in a discrepancy between the physical count of inventory and the amount recorded in the accounting records.

Identify the impact of inventory shrinkage on financial statements: Inventory shrinkage reduces the actual inventory available, which can lead to an overstatement of assets if not properly adjusted. This, in turn, can result in an overstatement of net income.

Determine how inventory shrinkage is recorded: Inventory shrinkage is recorded as an expense in the income statement, typically under 'Cost of Goods Sold' (COGS) or a separate 'Inventory Shrinkage' account. It is not recorded as an increase in inventory on the balance sheet.

Analyze the causes of inventory shrinkage: Common causes include theft, damage, miscounting, or recording errors. These factors can lead to discrepancies between the physical count and the book value of inventory.

Adjust the accounting records: To account for inventory shrinkage, the company must adjust the inventory balance on the balance sheet and record the shrinkage expense in the income statement to ensure accurate financial reporting.