Is it true that falsely increasing the perpetual inventory balance conceals inventory shrinkage?

The assertion that falsely increasing the perpetual inventory balance conceals inventory shrinkage is indeed false. When a company misrepresents its inventory balance by inflating the perpetual inventory records, it does not actually address the underlying issue of inventory shrinkage, which refers to the loss of inventory due to theft, damage, or errors.

Falsifying inventory records may create a temporary illusion of higher inventory value, but it does not prevent loss from occurring in reality. Inventory shrinkage will continue to affect actual stock levels and will eventually become apparent when physical counts or audits are conducted. If the true amount of inventory has shrunk, then a subsequent reconciliation will reveal discrepancies between the reported inventory and the physical inventory on hand. This disconnect can lead to more severe investigations and potential consequences for the organization, including damage to credibility and financial statements.

In summary, while inflating inventory figures may hide the problem temporarily, it does not conceal the actual loss from inventory shrinkage. The correct stance on this assertion is that it is false.