Question

In the Home Depot financial statements in Appendix A at the end of this textbook, find Note 1 to the financial statements summarizing the company's significant accounting policies. Read the section in Note 1 entitled “Merchandise Inventories.”

a. Home Depot defines shrink as "the difference between the recorded amount of inventory and the physical inventory." State whether the above statement is true or false.

	State whether the above statement is true or false.

b. Following are the causes of inventory shrink mentioned by Home Depot. Classify those causes as value-added or non-value-added.

	(i) Theft (ii) Loss (iii) Improper records for the receipt of inventory (iv) Deterioration of goods

  

c. Home Depot measures shrink by comparing the current period physical inventories with that of the previous period. State whether the above statement is true or false.

	State whether the above statement is true or false.

d. Home Depot accrues estimated losses for shrink until a physical inventory can be undertaken to accurately measure shrink and then adjusts the loss account to properly reflect the cost of shrink. State whether the above statement is true or false.

	State whether the above statement is true or false.

Answer 1

A) Answer is True. SHRINKAGE means the difference in value of physical inventory and recorded inventory.

B) Answer is as follows.

All the four causes are Non value added because Home Depot measures shrink by undertaking regular physical inventories and comparing those inventories to its records.

So all the above 4 causes are Non value added.

C) Answer is true.

Home depot measures shrink by comparing the current period physical inventory with that of the previous period.

D) Answer is True.

Home depot accrues losses for shrink until a physical inventory can be undetaken to accurately measure shrink and then adjust the loss account to properly reflect the cost of shrink.

Thank you.