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concludes that respondent's method “contains a systematic bias
towards the understatement of losses during periods when sales
are increasing.”
4. Sales Percentage Shrinkage Analyses
To further examine the accuracy of Target's shrinkage
method, Dr. Seago computed for each Target store during the
taxable years ending in 1980 through 1989 (1) the verified
shrinkage between physical inventory dates as a percentage of
sales for that period (actual shrinkage), (2) the shrinkage
estimates accrued in book inventory as a percentage of sales for
the same period (estimated shrinkage), and (3) the difference
between (1) and (2). Dr. Seago hypothesized that, if Target
could accurately predict shrinkage between physical inventory
dates, i.e., the difference between actual and estimated
shrinkage is small, Target should likewise accurately predict
shrinkage for the taxable year.
Dr. Seago's calculations revealed that, over the period
examined, the simple average difference between actual and
estimated shrinkage was 0.12 percent of sales and the weighted
average (weighted by sales) difference was 0.16 percent of sales.
That difference represents approximately 7 percent of actual
shrinkage. In addition, Dr. Seago performed a regression
analysis comparing sales and shrinkage for each Target store
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