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4. Shrinkage Accrual Accuracy Analysis
Dr. Bates is of the opinion that yearend shrinkage can
reasonably be estimated by allocating a portion of the shrinkage
revealed by the next physical count to the physical-to-yearend
period. Dr. Bates has made such estimates in order to test the
accuracy of the retailers’ shrinkage accruals. He concludes
that, for each of the retailers, annual losses, in the aggregate,
claimed on account of shrinkage factors are within 5 percent of
taxable year shrinkage based on an allocation of cross-year
inventory shrinkage as a function of both sales and time.
Dr. Bates knew the amount of losses from inventory cycles
wholly within a taxable year. To that sum he added (1) an
allocation of the shrinkage determined by the physical inventory
first taken during the taxable year and (2) an allocation of the
shrinkage determined by the physical inventory first taken during
the next taxable year. That calculation provided his estimate of
taxable year shrinkage. Dr. Bates calculated taxable year
shrinkage using sales to allocate shrinkage to the relevant
portions of cross-year inventory cycles (sales-based taxable year
shrinkage). To provide an alternative estimate of actual
shrinkage, Dr. Bates calculated taxable year shrinkage using a
time-based allocation method (time-based taxable year shrinkage).
That approach allowed him to have a second way to test the
accuracy of the losses from shrinkage factors that the retailers
reported for tax purposes.
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