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3. Yearend Shrinkage
Dr. Bates is of the opinion that losses from shrinkage
factors occur during the physical-to-yearend period. That
proposition is not as simple to demonstrate as one might think.
The problem, of course, is that, although losses on account of
shrinkage factors will be demonstrated by physical count at the
end of an accounting period, the lack of intervening physical
counts makes it impossible to demonstrate the distribution of
those losses within the period.
Dr. Bates primarily derives his opinion by deduction from
two premises: (1) sales occur during the physical-to-yearend
period and (2) there exists a strong correlation between sales
and shrinkage. In other words, he concludes that, because there
are sales during the physical-to-yearend period, and there is a
statistical relationship between sales and shrinkage, it is
likely that losses from shrinkage factors occur during the
physical-to-yearend period. He conducted two additional tests,
however, which gave him more evidence to support his conclusion.
First, he compared shrinkage among inventory cycles with
physical-to-yearend periods of differing lengths. Second, he
applied a conventional statistical analysis to test for the
occurrence of yearend shrinkage.
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