Final answer:
Shrinkage, considered as an immaterial amount, is typically added to the cost of goods sold rather than being recorded as a direct expense in financial reports.
Step-by-step explanation:
Shrinkage in inventory is usually considered an immaterial amount and, rather than being recorded as an expense, it is often added to the cost of goods sold (COGS). This is because shrinkage, which includes theft, damage, or errors in counting, typically represents a small percentage of the inventory's total value and expensing it separately could unnecessarily complicate financial statements. However, if shrinkage levels are consistently high or increase significantly, then they can become material and would need to be reported as a loss.