The Kroger Company and Subsidiaries - Page 5

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                  During the years in issue, the retailers used “cycle                                
            counting” to conduct physical inventories of merchandise.  Cycle                          
            counting is a method of conducting physical inventories at                                
            individual stores, in rotation, throughout the year.  Most large                          
            retail companies, including grocery and drug retailers, 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.  With few exceptions, the retailers                         
            took no physical inventories at the end of any of the years in                            
                  The retailers maintained “perpetual” or other book inventory                        
            records (without distinction, book inventory records) from which                          
            inventory could be determined without a physical count.                                   
            Inventory determined from book inventory records often differs                            
            from inventory determined by physical count.  When inventory is                           
            determined from book inventory records (computed without any                              
            accrual for estimated shrinkage), and the inventory so determined                         
            exceeds inventory determined by physical count, the difference is                         
            termed “shrinkage”.  When book inventory so determined is                                 
            exceeded by inventory determined by physical count, the                                   
            difference is termed “overage”.                                                           

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Last modified: May 25, 2011