Garrett Company uses the perpetual inventory system.The company's records showed a book balance of $18,000 in the Merchandise Inventory account,and a physical count finds only $16,250 of inventory.Which of the following represents the financial statement effect of writing-down the inventory?

Question

Quizplus · Accepted Answer

The inventory shrinkage of $1,750 (or $18,000 ? $16,250) decreases assets (inventory) and stockholders' equity (retained earnings). It increases expenses (cost of goods sold) and decreases net income. It does not affect cash flows.

Garrett Company Uses the Perpetual Inventory System