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cycle counting is used, and the cycle for a particular store does
not end on the last day of the year, then losses from shrinkage
factors for the physical-to-yearend period (yearend shrinkage)
must be estimated if such yearend shrinkage is to be taken into
account.
Petitioner maintained a “Controller's Manual” containing a
standard control procedure to set forth corporate policy for
accounting for inventory shrinkage and for planning and reporting
physical inventory results. That manual provided that all
companies must take at least one complete physical inventory a
year. It further provided that “[e]ach Operating Company
Controller is responsible for accounting for inventory shrinkage
in accordance with the accrual basis of accounting.” The manual
defined the term “inventory shrinkage accrual rate” as “[t]he
rate at which inventory is written off to cost of sales to
provide for inventory shrinkage. The rate is stated as a
percentage of net sales.” The manual further provided for the
adjustment of physical inventory results as follows:
When physical inventory shortage is less than the
provision [i.e., the accrual] for inventory shrinkage,
cost of sales should be reduced for the calculated
difference between the physical inventory shortage and
the provision for inventory shrinkage.
When physical inventory shortage is more than the
provision for inventory shrinkage, cost of sales should
be increased for the calculated difference between the
physical inventory shortage and the provision for
inventory shrinkage.
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Last modified: May 25, 2011