Inventory Shrinkage Adjustment

Margie Johnson is a staff accountant at Toolex Company, a manufacturer of tools and equipment. The company is under pressure from investors to increase earnings, and the president of the company expects the Accounting Department to $$make this happen.$$ Margie$$s boss, who has been a mentor to her, is concerned that if earnings do not increase, he will be terminated.

Shortly after the end of the fiscal year, the company performs a physical count of the inventory. When Margie compares the physical count to the balance in the inventory account, she finds a significant amount of inventory shrinkage. The amount is so large that it will result in a significant drop in earnings this period. Margie$$s boss asks her not to make the adjusting entry for shrinkage this period. He assures her that they will get $$caught up$$ on shrinkage in the next period, after the pressure is off to reach this period$$s earnings goal. Margie$$s boss asks her to do this as a personal favor to him.

$1-$ What should Margie do in this situation? $2-$ What effect will not making the adjustment have to which accounts and which financial statements?