Questions: 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?

To determine how recognizing the inventory shrinkage will affect Voss Company's financial statements, we need to consider the impact on the balance sheet and the income statement.

Inventory shrinkage occurs when the physical count of inventory is less than the recorded amount. In this case, the recorded inventory is $35,000, but the physical count is $34,300. Therefore, the shrinkage is:

\[ \text{Shrinkage} = \$35,000 - \$34,300 = \$700 \]

1. Balance Sheet:

   • Assets: Inventory will decrease by $700, reflecting the actual physical count.
   • Equity: Retained earnings will decrease by $700 due to the expense recognized.

2. Income Statement:

   • Expenses: An inventory shrinkage expense of $700 will be recorded, reducing net income.

Recognizing the inventory shrinkage will decrease both the inventory on the balance sheet and the net income on the income statement by $700. This reflects the loss of inventory and the associated cost.