You are the financial officer for Music Plus, a retailer that sells goods for home entertainment needs. The business owner, Jamie Madsen, recently reviewed the annual financial statements you prepared and sent you an e-mail stating that he thinks you overstated net income. He explains that although he has invested a great deal in security, he is sure shoplifting and other forms of inventory shrinkage have occurred, but he does not see any deduction for shrinkage on the income statement. The store uses a perpetual inventory system.

Required

Prepare a brief memorandum that responds to the owner’s concerns.