Indicate whether each of the following statements is true or false. (Assume a perpetual inventory system.)________ a) In a perpetual inventory system, an employee theft is discovered immediately.________ b) No adjusting entry is required for inventory losses under a perpetual inventory system.________ c) Inventory shrinkage is calculated as the difference between the beginning and ending balances in the merchandise inventory account.________ d) In a perpetual inventory system, adjustments for lost, damaged or stolen merchandise are recorded as expenses.________ e) The entry to record inventory losses due to employee theft or shoplifting has a negative effect on the statement of cash flows.

Question

What will be an ideal response?

Answer 1

a) F b) F c) F d) T e) F

a) This is false. In a perpetual inventory system, theft is not detected until a physical count is taken.
b) This is false. An adjusting entry to write-down inventory is necessary to recognize inventory losses in a perpetual system.
c) This is false. Inventory shrinkage is calculated as the difference between book inventory and physical inventory.
d) This is true. Adjustments for losses due to shrinkage are recorded as expenses, typically cost of goods sold.
e) This is false. Inventory losses have no impact on the statement of cash flows.