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the actual shrinkage for the year through the physical inventory
date. For the period from the beginning of the year to the date
of the physical inventory, the estimated shrinkage combined with
the part of the physical inventory adjustment attributable to the
current year was the amount of actual shrinkage for that period
as verified by the physical count. This was so without regard to
any difference between the shrinkage estimate and the actual
shrinkage for the period.
We recognize that the period over which petitioners'
shrinkage can be known with a higher degree of certainty is the
period from physical inventory to physical inventory; i.e., this
is the period over which the amount of shrinkage can be verified
by physical count. Any analysis of this period alone, however,
is inappropriate because it ignores an important part of
petitioners' method of accounting; namely, the adjustment that is
made on the last day of that cycle when the book inventory is
adjusted to the physical count. Yet, if this adjustment is made,
the analysis is unhelpful to us in determining the reasonableness
of the stub period shrinkage estimate because, at the time of the
physical count, petitioners' method of accounting is as precise
as the physical count. Accordingly, any analysis of the physical
inventory cycle alone either ignores a fundamental part of
petitioners' method of annual accounting (i.e., the reconciling
adjustment booked at the time of the physical count) or shows
that the method is accurate at the time of the physical count.
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