Multiple Choice
When taking a physical count of inventory at year-end, which of the following items should be included in the company’s inventory balance?
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5. Inventory
Physical Inventory Count, Ownership of Goods, and Consigned Goods
Multiple Choice
In the context of a physical inventory count (including ownership issues such as goods in transit and consigned goods), which of the following does NOT cause inventory shrinkage?
A
Clerical errors in recording purchases or sales in the inventory records
B
Theft of inventory by employees or customers
C
Damage and spoilage discovered during the physical count
D
Recording a sale but failing to record the related cost of goods sold due to an error in the perpetual inventory system
Verified step by step guidance1
Step 1: Understand the concept of inventory shrinkage. Inventory shrinkage refers to the loss of inventory that is not accounted for by sales, typically caused by theft, damage, spoilage, or errors in physical counting or recording of inventory quantities.
Step 2: Identify common causes of inventory shrinkage. These include theft by employees or customers, damage or spoilage of goods, and clerical errors such as mistakes in recording purchases or sales that affect inventory records.
Step 3: Analyze the impact of recording errors in the perpetual inventory system. Specifically, recording a sale but failing to record the related cost of goods sold affects the accounting records but does not physically reduce the inventory on hand, so it does not cause actual shrinkage.
Step 4: Differentiate between physical inventory loss and accounting errors. Inventory shrinkage relates to physical loss or miscount of inventory, whereas errors in recording cost of goods sold affect financial statements but not the physical inventory quantity.
Step 5: Conclude that among the options, the error of recording a sale without recording the cost of goods sold does NOT cause inventory shrinkage because it is an accounting error, not a physical loss of inventory.
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