Multiple Choice
Damaged, obsolete (out-of-date), and/or deteriorated goods that can be sold should be reported in the financial statements at:
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5. Inventory
Inventory Errors
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Identify the statement below that is the correct definition of inventory shrinkage.
A
Inventory shrinkage is the gain in inventory due to overstatements in the accounting records.
B
Inventory shrinkage is the process of increasing inventory levels to meet anticipated demand.
C
Inventory shrinkage refers to the intentional reduction of inventory through sales promotions.
D
Inventory shrinkage is the loss of inventory due to theft, damage, or errors, resulting in a physical count that is less than the recorded amount.
Verified step by step guidance1
Understand the term 'inventory shrinkage' in the context of financial accounting. It refers to the loss of inventory that occurs due to factors such as theft, damage, or errors in record-keeping.
Review the provided options and eliminate those that do not align with the definition of inventory shrinkage. For example, inventory shrinkage is not a gain in inventory, nor is it related to increasing inventory levels or intentional reductions through sales promotions.
Focus on the option that describes inventory shrinkage as a loss of inventory, which results in a physical count being less than the recorded amount in the accounting records.
Verify the selected option by comparing it to the standard definition of inventory shrinkage in financial accounting literature or guidelines.
Conclude that the correct definition of inventory shrinkage is: 'Inventory shrinkage is the loss of inventory due to theft, damage, or errors, resulting in a physical count that is less than the recorded amount.'
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