Question

At the end of its Year 1 accounting period, Voss Company had a $35,000 balance in its inventory account. Even so, when the company took a physical count of the inventory, it found only $34,300 of inventory on hand. Which of the following shows how recognizing the inventory shrinkage will affect the Company’s financial statements?

Answer 1

Recognizing the inventory shrinkage will affect the Company's financial statements as follows:

Income Statement: The inventory shrinkage will be recognized as a loss on the income statement. It will be included as an expense under the cost of goods sold (COGS) section, which will reduce the company's gross profit and net income for the accounting period.

Balance Sheet: The inventory shrinkage will also impact the balance sheet. The inventory account will be adjusted to reflect the lower value of $34,300 instead of the previously recorded balance of $35,000. This adjustment will decrease the value of the company's current assets and, consequently, its total assets.

Statement of Cash Flows: The inventory shrinkage does not directly affect the cash flow statement since it is a non-cash item. However, if the shrinkage is significant and leads to a decrease in net income, it may indirectly affect cash flows through changes in taxes payable or changes in operating activities.

In summary, recognizing the inventory shrinkage will result in a decrease in net income on the income statement, a reduction in the value of inventory on the balance sheet, and potential indirect effects on the statement of cash flows.

Explanation: