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F. Shrinkage Accruals and LIFO
The shrinkage accruals made by the retailers were only
estimates, and because they were estimates, they were subject to
error. We have found that errors in estimating shrinkage
accruals were 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. Respondent argues,
however, that the additional demands associated with the
retailers’ use of LIFO “compounds” the errors inherent in making
shrinkage accruals.
Respondent presents the expert testimony of David W. LaRue,
Ph.D., an associate professor of commerce at the University of
Virginia, who testified to, among other things, the “tax effects”
resulting from the accrual of erroneous estimates of undetected
shrinkage for the KFS division. Dr. LaRue examined the KFS
division’s practice of making shrinkage accruals. He designed
simulation models to analyze shrinkage estimation errors under
the retail dollar value LIFO method used by the KFS division. He
concluded that the process of making subsequent year corrections
was inadequate because of changes in factors such as LIFO
inflation adjustment factors and retail method cost complement
factors. Respondent also presented the report and testimony of
William R. Sutherland, Esq., an attorney and accountant.
Mr. Sutherland came to essentially the same conclusions for
Superx that Dr. LaRue came to for the KFS division.
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