Assume that employees confessed to a $500,000 inventory theft but are not able to make restitution. How should this material fraud be shown in the company?s financial statements?

Classified as a loss and shown as a separate line item in the income statement.Initially classified as an accounts receivable because the employees are responsible for the goods. Because they cannot pay, the loss would be recognized as a write-off of accounts receivable.Included in cost of goods sold because the goods are not on hand, losses on inventory shrinkage are ordinary, and it would cause the least amount of attention.Recorded directly to retained earnings because it is not an income-producing item.

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