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each department for each taxable year. The accruals were posted
directly to the perpetual inventory system on a monthly basis,
and adjustments were made to account for accrual errors.
Dayton's established accrual rates as a percentage of sales
on a departmental basis. The department rate was applied
throughout the Dayton's division. In setting a department
accrual rate, Dayton's considered numerous factors including the
most recent shrinkage history and shrinkage trends of the
particular department, the employment of new marketing
strategies, changes in demographics, trends that were developing
in related departments, changes in security procedures, and
particular theft problems.
Dayton's did not set a companywide accrual rate. The
companywide accrual figure was simply the aggregate of the
accruals for all of the departments.
4. Application of Accruals for Shrinkage
Dayton's used its accruals for shrinkage for the following
purposes: (1) financial and tax reporting, (2) to determine the
budget that would be available for the purchase of inventory in a
particular department, (3) to evaluate the performance of
department heads, and (4) to determine the sources of shrinkage.
B. Dayton's Physical Inventories
Dayton's conducted its physical inventories of its
departments by counting inventory on the same day at every store
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