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Definition of shrinkage

Shrinkage Image 1

shrinkage

a decrease in units arising from an inherent characteristic
of the production process; it includes decreases
caused by evaporation, leakage, and oxidation


Shrinkage

The excess of inventory listed in the accounting books of record, but which
no longer exists in the actual inventory. Its disappearance may be due to theft, damage,
miscounting, or evaporation.


Shrinkage

Any uncontrolled loss of inventory, such as through evaporation or theft.



Related Terms:

inventory shrinkage

A term describing the loss of products from inventory
due to shoplifting by customers, employee theft, damaged and
spoiled products that are thrown away, and errors in recording the purchase
and sale of products. A business should make a physical count and
inspection of its inventory to determine this loss.


Inventory Shrinkage

A shortfall between inventory based on actual physical counts and inventory
based on book records. This shortfall may be due to such factors as theft, breakage, loss, or
poor recordkeeping.


Shrinkage factor

The expected loss of some proportion of an item during the
production process, expressed as a percentage.



ABC inventory classification

A method for dividing inventory into classifications,
either by transaction volume or cost. Typically, category A includes that 20% of
inventory involving 60% of all costs or transactions, while category B includes
the next 20% of inventory involving 20% of all costs or transactions, and category
C includes the remaining 60% of inventory involving 20% of all costs or
transactions.


Accounting

A collection of systems and processes used to record, report and interpret business transactions.


Shrinkage Image 1

accounting

A broad, all-inclusive term that refers to the methods and procedures
of financial record keeping by a business (or Any entity); it also
refers to the main functions and purposes of record keeping, which are
to assist in the operations of the entity, to provide necessary information
to managers for making decisions and exercising control, to measure
profit, to comply with income and other tax laws, and to prepare financial
reports.


Accounting and Auditing Enforcement Release (AAER)

Administrative proceedings or litigation releases that entail an accounting or auditing-related violation of the securities laws.


Accounting change

An alteration in the accounting methodology or estimates used in
the reporting of financial statements, usually requiring discussion in a footnote
attached to the financial statements.


Accounting earnings

Earnings of a firm as reported on its income statement.


Accounting entity

A business for which a separate set of accounting records is being
maintained.


Accounting equation

The representation of the double-entry system of accounting such that assets are equal to liabilities plus capital.


Accounting equation

The formula Assets = Liabilities + Equity.


accounting equation

An equation that reflects the two-sided nature of a
business entity, assets on the one side and the sources of assets on the
other side (assets = liabilities + owners’ equity). The assets of a business
entity are subject to two types of claims that arise from its two basic
sources of capital—liabilities and owners’ equity. The accounting equation
is the foundation for double-entry bookkeeping, which uses a
scheme for recording changes in these basic types of accounts as either
debits or credits such that the total of accounts with debit balances
equals the total of accounts with credit balances. The accounting equation
also serves as the framework for the statement of financial condition,
or balance sheet, which is one of the three fundamental financial
statements reported by a business.


Accounting Errors

Unintentional mistakes in financial statements. Accounted for by restating
the prior-year financial statements that are in error.


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Accounting exposure

The change in the value of a firm's foreign currency denominated accounts due to a
change in exchange rates.


Accounting insolvency

Total liabilities exceed total assets. A firm with a negative net worth is insolvent on
the books.



Accounting Irregularities

Intentional misstatements or omissions of amounts or disclosures in
financial statements done to deceive financial statement users. The term is used interchangeably with fraudulent financial reporting.


Accounting liquidity

The ease and quickness with which assets can be converted to cash.


Accounting period

The period of time for which financial statements are produced – see also financial year.


Accounting Policies

The principles, bases, conventions, rules and procedures adopted by management in preparing and presenting financial statements.


Accounting rate of return (ARR)

A method of investment appraisal that measures
the profit generated as a percentage of the
investment – see return on investment.


accounting rate of return (ARR)

the rate of earnings obtained on the average capital investment over the life of a capital project; computed as average annual profits divided by average investment; not based on cash flow


Accounting system

A set of accounts that summarize the transactions of a business that have been recorded on source documents.


Accrual accounting

The recording of revenue when earned and expenses when
incurred, irrespective of the dates on which the associated cash flows occur.


accrual-basis accounting

Well, frankly, accrual is not a good descriptive
term. Perhaps the best way to begin is to mention that accrual-basis
accounting is much more than cash-basis accounting. recording only the
cash receipts and cash disbursement of a business would be grossly
inadequate. A business has mAny assets other than cash, as well as
mAny liabilities, that must be recorded. Measuring profit for a period as
the difference between cash inflows from sales and cash outflows for
expenses would be wrong, and in fact is not allowed for most businesses
by the income tax law. For management, income tax, and financial
reporting purposes, a business needs a comprehensive record-keeping
system—one that recognizes, records, and reports all the assets and liabilities
of a business. This all-inclusive scope of financial record keeping
is referred to as accrual-basis accounting. Accrual-basis accounting
records sales revenue when sales are made (though cash is received
before or after the sales) and records expenses when costs are incurred
(though cash is paid before or after expenses are recorded). Established
financial reporting standards require that profit for a period
must be recorded using accrual-basis accounting methods. Also, these
authoritative standards require that in reporting its financial condition a
business must use accrual-basis accounting.


Shrinkage Image 3

Accruals accounting

A method of accounting in which profit is calculated as the difference between income when it is earned and expenses when they are incurred.



Actual cost

The actual expenditure made to acquire an asset, which includes the supplierinvoiced
expense, plus the costs to deliver and set up the asset.


actual cost system

a valuation method that uses actual direct
material, direct labor, and overhead charges in determining
the cost of Work in process inventory


Actuals

The physical commodity underlying a futures contract. Cash commodity, physical.


Agency pass-throughs

Mortgage pass-through securities whose principal and interest payments are
guaranteed by government agencies, such as the Government National Mortgage Association ("Ginnie Mae"), Federal Home Loan Mortgage Corporation ("Freddie Mac") and Federal National Mortgage Association ("Fannie Mae").


Aggregate Production Function

An equation determining aggregate output as a function of aggregate inputs such as labor and capital.


Aggressive Accounting

A forceful and intentional choice and application of accounting principles
done in an effort to achieve desired results, typically higher current earnings, whether the practices followed are in accordance with generally accepted accounting principles or not. Aggressive
accounting practices are not alleged to be fraudulent until an administrative, civil, or criminal proceeding takes that step and alleges, in particular, that an intentional, material misstatement
has taken place in an effort to deceive financial statement readers.


Allocation base A measure of activity or volume such as labour

hours, machine hours or volume of production
used to apportion overheads to products and
services.


Annuity due

An annuity with n payments, wherein the first payment is made at time t = 0 and the last
payment is made at time t = n - 1.


Annuity Due

Annuity where the payments are to be made at the beginning of
each period


annuity due

a series of equal cash flows being received or paid at the beginning of a period


annuity due

Level stream of cash flows starting immediately.


Asian currency units (ACUs)

Dollar deposits held in Singapore or other Asian centers.


Average accounting return

The average project earnings after taxes and depreciation divided by the average
book value of the investment during its life.


Average-Cost Inventory Method

The inventory cost-flow assumption that assigns the average
cost of beginning inventory and inventory purchases during a period to cost of goods sold and
ending inventory.


Average inventory

The beginning inventory for a period, plus the amount at the end of
the period, divided by two. It is most commonly used in situations in which just
using the period-end inventory yields highly variable results, due to constant and
large changes in the inventory level.


Base probability of loss

The probability of not achieving a portfolio expected return.


Blanket inventory lien

A secured loan that gives the lender a lien against all the borrower's inventories.


Blue-chip company

Large and creditworthy compAny.


Book inventory

The amount of money invested in inventory, as per a compAny’s
accounting records. It is comprised of the beginning inventory balance, plus the
cost of Any receipts, less the cost of sold or scrapped inventory. It may be significantly
different from the actual on-hand inventory, if the two are not periodically
reconciled.


business process reengineering (BPR)

the process of combining information technology to create new and more effective
business processes to lower costs, eliminate unnecessary
work, upgrade customer service, and increase
speed to market


CAPITAL IN EXCESS OF PAR VALUE

What a compAny collected when it sold stock for more than the par value per share.


Capital in excess par

Amounts in excess of the par value or stated value that have been paid by the public to acquire stock in the compAny; synonymous with additional paid-in capital.


Capital loss

The difference between the net cost of a security and the net sale price, if that security is sold at a loss.


capital loss

The negative difference between the adjusted cost base of an investment held as a capital property and the proceeds of disposition you receive when you sell it. When you sell such an investment for less than you paid, you incur a capital loss.


Cash accounting

A method of accounting in which profit is calculated as the difference between income
when it is received and expenses when they are paid.


Change in Accounting Estimate

A change in accounting that occurs as the result of new information
or as additional experience is acquired—for example, a change in the residual values
or useful lives of fixed assets. A change in accounting estimate is accounted for prospectively,
over the current and future accounting periods affected by the change.


Change in Accounting Estimate

A change in the implementation of an existing accounting
policy. A common example would be extending the useful life or changing the expected residual
value of a fixed asset. Another would be making Any necessary adjustments to allowances for
uncollectible accounts, warranty obligations, and reserves for inventory obsolescense.


Change in Accounting Principle

A change from one generally accepted accounting principle to another generally accepted accounting principle—for example, a change from capitalizing expenditures
to expensing them. A change in accounting principle is accounted for in most instances
as a cumulative-effect–type adjustment.


Characteristic line

The market model applied to a single security. The slope of the line is a security's beta.


Company Acquisitions

Assets acquired to create money. May include plant, machinery and equipment, shares of another compAny etc.


company cost of capital

Expected rate of return demanded by investors in a compAny, determined by the average risk of the compAny’s assets and operations.


Company-specific risk

Related: Unsystematic risk


Companyspecific Risk

See asset-specific risk


Comprehensive due diligence investigation

The investigation of a firm's business in conjunction with a
securities offering to determine whether the firm's business and financial situation and its prospects are
adequately disclosed in the prospectus for the offering.


Constant dollar accounting

A method for restating financial statements by reducing or
increasing reported revenues and expenses by changes in the consumer price index,
thereby achieving greater comparability between accounting periods.


continuous loss

Any reduction in units that occurs uniformly
throughout a production process


Contract Accounting

Method of accounting for sales or service agreements where completion
requires an extended period.


Conventional pass-throughs

Also called private-label pass-throughs, Any mortgage pass-through security not
guaranteed by government agencies. Compare agency pass-throughs.


Corporate processing float

The time that elapses between receipt of payment from a customer and the
depositing of the customer's check in the firm's bank account; the time required to process customer
payments.


cost accounting

a discipline that focuses on techniques or
methods for determining the cost of a project, process, or
thing through direct measurement, arbitrary assignment, or
systematic and rational allocation


Cost Accounting Standards Board (CASB)

a body established by Congress in 1970 to promulgate cost accounting
standards for defense contractors and federal agencies; disbanded
in 1980 and reestablished in 1988; it previously issued
pronouncements still carry the weight of law for those
organizations within its jurisdiction


cost-benefit analysis the analytical process of comparing the

relative costs and benefits that result from a specific course
of action (such as providing information or investing in a
project)


Cost company arrangement

Arrangement whereby the shareholders of a project receive output free of
charge but agree to pay all operating and financing charges of the project.


cost of production report

a process costing document that
details all operating and cost information, shows the computation
of cost per equivalent unit, and indicates cost assignment
to goods produced during the period


Cost Plus Estimated Earnings in Excess of Billings

Revenue recognized to date under the percentage-of-completion method in excess of amounts billed. Also known as unbilled accounts
receivable.


Creative Accounting Practices

Any and all steps used to play the financial numbers game, including
the aggressive choice and application of accounting principles, both within and beyond
the boundaries of generally accepted accounting principles, and fraudulent financial reporting.
Also included are steps taken toward earnings management and income smoothing. See Financial
Numbers Game.


Creative Acquisition Accounting

The allocation to expense of a greater portion of the price
paid for another compAny in an acquisition in an effort to reduce acquisition-year earnings and
boost future-year earnings. Acquisition-year expense charges include purchased in-process research
and development and an overly aggressive accrual of costs required to effect the acquisition.


Credit Loss

A loan receivable that has proven uncollectible and is written off.


Cumulative Effect of a Change in Accounting Principle

The change in earnings of previous years
based on the assumption that a newly adopted accounting principle had previously been in use.


Cumulative Effect of Accounting Change

The change in earnings of previous years assuming
that the newly adopted accounting principle had previously been in use.


Date of record

Date on which holders of record in a firm's stock ledger are designated as the recipients of
either dividends or stock rights.


Days' sales in inventory ratio

The average number of days' worth of sales that is held in inventory.


Depository Trust Company (DTC)

DTC is a user-owned securities depository which accepts deposits of
eligible securities for custody, executes book-entry deliveries and records book-entry pledges of securities in
its custody, and provides for withdrawals of securities from its custody.


Devaluation A decrease in the spot price of the currency



Diffusion process

A conception of the way a stock's price changes that assumes that the price takes on all
intermediate values. dirty price. Related: full price


discrete loss

a reduction in units that occurs at a specific
point in a production process


Distribution inventory

inventory intended for shipment to customers, usually
comprised of finished goods and service items.


dollar days (of inventory)

a measurement of the value of inventory for the time that inventory is held


double-entry accounting

See accrual-basis accounting.


Due bill

An instrument evidencing the obligation of a seller to deliver securities sold to the buyer.
Occasionally used in the bill market.


Due Diligence

The process of systematically evaluating information, to identify risks and issues relating to a proposed transaction.(i.e. verify that information is what it is proposed to be).


economic production run (EPR)

an estimate of the number
of units to produce at one time that minimizes the total
costs of setting up production runs and carrying inventory


Ending inventory

The dollar value or unit total of goods on hand at the end of an
accounting period.


equivalent units of production (EUP)

an approximation of the number of whole units of output that could have been
produced during a period from the actual effort expended
during that period; used in process costing systems to assign
costs to production


Excess Capacity

Unused production capacity.


Excess Demand

A situation in which demand exceeds supply.


Excess reserves

Any excess of actual reserves above required reserves.


Excess Reserves

Reserves of commercial banks in excess of those they are legally required to hold.


Excess return on the market portfolio

The difference between the return on the market portfolio and the
riskless rate.


Excess returns

Also called abnormal returns, returns in excess of those required by some asset pricing model.


Excess Supply

A situation in which supply exceeds demand.


Extraordinary Gain or Loss

Gains and losses that are judged to be both unusual and nonrecurring.


extraordinary gains and losses

No pun intended, but these types of gains
and losses are extraordinarily important to understand. These are nonrecurring,
onetime, unusual, nonoperating gains or losses that are
recorded by a business during the period. The amount of each of these
gains or losses, net of the income tax effect, is reported separately in the
income statement. Net income is reported before and after these gains
and losses. These gains and losses should not be recorded very often, but
in fact mAny businesses record them every other year or so, causing
much consternation to investors. In addition to evaluating the regular
stream of sales and expenses that produce operating profit, investors
also have to factor into their profit performance analysis the perturbations
of these irregular gains and losses reported by a business.


Factor of Production

A resource used to produce a good or service. The main macroeconomic factors of production are capital and labor.


FIFO method (of process costing)

the method of cost assignment that computes an average cost per equivalent
unit of production for the current period; keeps beginning
inventory units and costs separate from current period production
and costs


Finance Company

CompAny engaged in making loans to individuals or businesses. Unlike a bank, it does not receive deposits from the public.


Financial accounting

The production of financial statements, primarily for those interested parties who are external to the business.



 

 

 

 

 

 

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