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 regarding inventory shrinkage is FALSE?

Inventory shrinkage increases reported net income because it reduces cost of goods sold.

Inventory shrinkage is typically discovered by comparing physical inventory counts to recorded inventory balances.

Inventory shrinkage is recorded as an expense in the period in which it is discovered.

Inventory shrinkage refers to the loss of inventory due to theft, damage, or errors.

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Verified step by step guidance

Step 1: Understand the concept of inventory shrinkage. Inventory shrinkage refers to the loss of inventory due to theft, damage, or errors. It is a common issue in businesses that manage physical inventory.

Step 2: Review how inventory shrinkage is accounted for. When inventory shrinkage is discovered, it is recorded as an expense in the period in which it is identified. This ensures accurate financial reporting.

Step 3: Analyze the impact of inventory shrinkage on financial statements. Inventory shrinkage reduces the recorded inventory balance and increases expenses, which in turn decreases net income. It does not increase net income.

Step 4: Compare physical inventory counts to recorded inventory balances. Inventory shrinkage is typically discovered during physical inventory counts, which are compared to the inventory balances recorded in the accounting system.

Step 5: Evaluate the given statements. The false statement is: 'Inventory shrinkage increases reported net income because it reduces cost of goods sold.' This is incorrect because inventory shrinkage decreases net income by increasing expenses.