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inventory plus inventory purchased during the period minus
closing inventory.
Both Target and Dayton's used the “cycle counting” method of
conducting physical inventories. Cycle counting is a method of
conducting physical inventories at individual stores or
departments within stores, in rotation, throughout the year.
Most large retail companies do not perform a physical count of
inventory on or near the last day of the annual accounting
period. Large retailers prefer cycle counting to yearend
counting because it is more accurate and less expensive and
provides better inventory control. Cycle counting is also more
efficient and practical in terms of the availability of internal
resources and outside services to conduct physical inventories.
Generally, petitioner did not conduct physical inventories on the
last day of the taxable year in issue.
During 1983 and 1984, and for a number of years prior
thereto, petitioner maintained a “perpetual”, or book, inventory
system for its divisions and subsidiaries, including Target and
Dayton's. Under its perpetual inventory system, petitioner
debited its inventory or stock accounts with the cost of goods
purchased and credited those accounts with the cost of goods
sold. The perpetual inventory system also showed the sales
proceeds from goods sold.
During 1984, physical inventories were conducted on a store-
by-store basis within the Target division and on a departmental
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