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analysis of the correlation between sales and shrinkage at the
LIFO pool level would produce a more meaningful correlation and
attempts to examine that correlation by the creation of surrogate
pools in the absence of such data. We are not convinced by
Dr. Seago's analysis of hypothetical pools of data derived from
randomly placing individual Target stores into 21 pools because
that approach divorces particular sales and shrinkage figures for
each actual pool from the corresponding pool attributes; the
preservation of that relationship is precisely the purpose of
analyzing sales and shrinkage data at the LIFO pool level.
Because we are reluctant to accept Dr. Seago's 10-year
correlation analysis, his shrinkage accrual accuracy analysis
does not persuade us that Target's shrinkage method clearly
reflects income, that respondent's method does not clearly
reflect income, or that Target's shrinkage method more clearly
reflects income when compared to respondent's method. Dr. Seago
allocated accrual errors under the assumption, which was derived
from the 10-year correlation analysis, that sales and shrinkage
are perfectly correlated. In addition, Target's monthly accruals
for shrinkage were made as a percentage of sales. Therefore,
Dr. Seago's estimate of the actual taxable year shrinkage--sales-
allocated taxable year shrinkage--relies entirely on the critical
9(...continued)
significance of that finding to the issue of clear reflection of
income.
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