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cannot be determined for the period from the last physical count
to the end of the year (the physical-to-yearend period). If
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.
For each of the years in issue, the retailers estimated and
accrued yearend shrinkage (that estimate and accrual hereafter
being referred to as shrinkage accrual). Such shrinkage accruals
were added to the other data constituting the retailers’ book
inventory records, which were used to determine yearend
inventories. Shrinkage accruals reduced yearend inventories,
which had the effect of increasing cost of goods sold and, as a
result, decreasing gross income.
In determining yearend inventories, the retailers would, in
addition to taking into account shrinkage as determined by
physical count of inventory during the year (1) subtract
shrinkage accrual as of that year’s end and (2) add shrinkage
accrual as of the prior year’s end. Errors in estimating
shrinkage accrual would be subject to correction in the
subsequent year because of the addition of the prior year’s
shrinkage accrual to the subsequent year’s ending inventory. The
retailers calculated shrinkage accrual as a percentage of gross
sales. In the retail industry, the practice of making shrinkage
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Last modified: May 25, 2011