- 39 -
1993 162,692 1.70 188,526 1.98 25,834 0.28 16.47
Dr. Gaffney observed that out of the 14 years considered by him,
an overaccrual of shrinkage was made in 12 of those years.
3. Dr. LaRue
Dr. LaRue testified to, among other things, the “tax
effects” resulting from the accrual of erroneous estimates of
unverified shrinkage (shrinkage estimation errors). He designed
simulation models to analyze shrinkage estimation errors that
result from the use of cycle counting in conjunction with the
LIFO Retail Method. Dr. LaRue believes that the LIFO Retail
Method imposes certain additional demands on any method of
shrinkage estimation. To better appreciate Dr. LaRue's
assertion, we must acquire a basic understanding of the LIFO
Retail Method. See secs. 1.471-8, 1.472-1(k), 1.472-8(c), Income
Tax Regs.
The LIFO Retail Method is a method of inventory valuation
designed to meet the special needs of high volume retailers
dealing in a wide variety of merchandise. In general terms, the
sales at retail for an accounting period are subtracted from the
retail value of goods available for sale during that period to
produce a figure for the retail value of ending inventory. That
figure for the retail value of ending inventory must be converted
into a figure for cost of ending inventory, which can be
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