The Kroger Company and Subsidiaries - Page 6

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                  Shrinkage and overage (hereafter, generally, shrinkage) are                         
            attributable to a variety of factors, the total number of which                           
            cannot be quantified, including the following:                                            
                  1.  theft of merchandise (by employees, customers, and                              
                  2.  unrecorded or improperly recorded losses of merchandise                         
                  due to spoilage, breakage, and other damage;                                        
                  3.  unit discrepancies in goods received from and/or                                
                  returned to vendors;                                                                
                  4.  failure to ring or record the proper price upon sale of                         
                  5.  errors in recording retail prices (including price                              
                  changes) on a taxpayer’s perpetual record;                                          
                  6.  errors in marking and changing prices on merchandise;                           
                  7.  failure to properly record returns by customers;                                
                  8.  errors in conducting the physical inventory (including                          
                  both unit errors and pricing errors);                                               
                  9.  errors in processing paper (including price-change                              
                  documents, invoices, and merchandise transfers); and                                
                  10. errors in billing and other computer systems.                                   
                  The retailers experienced some or all of the factors listed                         
            (shrinkage factors) during the years in issue.  The occurrence of                         
            shrinkage factors is not limited to particular times during the                           
            year, but, generally, each of the factors occurs throughout the                           
                  C.  Accounting for Shrinkage                                                        
                  If inventory is not physically counted at the end of the                            
            annual accounting period (year), shrinkage (as defined above)                             

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Last modified: May 25, 2011