The Kroger Company and Subsidiaries - Page 7

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            cannot be determined for the period from the last physical count                          
            to the end of the year (the physical-to-yearend period).  If                              
            cycle counting is used, and the cycle for a particular store does                         
            not end on the last day of the year, then losses from shrinkage                           
            factors for the physical-to-yearend period (yearend shrinkage)                            
            must be estimated if such yearend shrinkage is to be taken into                           
                  For each of the years in issue, the retailers estimated and                         
            accrued yearend shrinkage (that estimate and accrual hereafter                            
            being referred to as shrinkage accrual).  Such shrinkage accruals                         
            were added to the other data constituting the retailers’ book                             
            inventory records, which were used to determine yearend                                   
            inventories.  Shrinkage accruals reduced yearend inventories,                             
            which had the effect of increasing cost of goods sold and, as a                           
            result, decreasing gross income.                                                          
                  In determining yearend inventories, the retailers would, in                         
            addition to taking into account shrinkage as determined by                                
            physical count of inventory during the year (1) subtract                                  
            shrinkage accrual as of that year’s end and (2) add shrinkage                             
            accrual as of the prior year’s end.  Errors in estimating                                 
            shrinkage accrual would be subject to correction in the                                   
            subsequent year because of the addition of the prior year’s                               
            shrinkage accrual to the subsequent year’s ending inventory.  The                         
            retailers calculated shrinkage accrual as a percentage of gross                           
            sales.  In the retail industry, the practice of making shrinkage                          

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Last modified: May 25, 2011