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books and records reflected the amount of inventory on hand as
verified by the count.
A comparison of the total annual shrinkage recorded in
petitioners' books (booked shrinkage) to the total shrinkage
verified by actual count (verified shrinkage) during each of the
years demonstrates that petitioners' method of estimation was
reasonable. The following table compares booked shrinkage as a
percentage of sales for the annual accounting period to verified
shrinkage as a percentage of sales for the period between the
physical inventory and the immediately preceding physical
inventory.
Shrinkage as a Percentage of Sales
Year Booked Verified
1983 1.47 1.48
1984 1.11 1.06
1985 1.36 1.37
1986 1.00 1.00
Although this comparison matches shrinkage for the physical
inventory cycle to shrinkage for the taxable year, which is a
different period, we believe that this comparison is appropriate
under the facts herein. Both periods cover the period from the
beginning of the taxable year to the physical inventory dates,
and both amounts of shrinkage relate to sales for the period over
which the shrinkage is measured. Moreover, the combination of
the monthly estimates for the period from the beginning of the
taxable year to the physical inventory date, taking into account
the adjustments made at the time of the physical counts, reflects
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