The Kroger Company and Subsidiaries - Page 8

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            accruals, and of calculating such accruals as a percentage of                             
            sales, is the prevalent, if not the virtually universal,                                  
            practice; it is the best practice in that industry.                                       
                  Respondent disallowed the retailers’ shrinkage accruals.                            
            That had the consequence of decreasing cost of goods sold and, as                         
            a result, increasing gross income.  Respondent has proposed                               
            deficiencies based upon that increased income.                                            
            II.  KFS Division of Kroger                                                               
                  A.  General Operations                                                              
                  Kroger managed its grocery products warehouses and                                  
            supermarkets on a geographic basis as Kroger Marketing Areas                              
            (KMAs).  A KMA contained between 34 and 161 supermarkets.  The                            
            KMAs were part of the Kroger Food Stores Division of Kroger (the                          
            KFS division).  Altogether, the KFS division operated between                             
            1,000 and 1,500 supermarkets between 1979 and 1992.  Each KMA had                         
            its own management organization, which was part of the Kroger                             
            management structure.  Management of each KMA reported to                                 
            corporate management in Kroger’s general office (the Kroger                               
            general office).  The Kroger general office set the policies that                         
            governed the operation of the KMAs.  After 1984, Florida Choice,                          
            although a division of Superx, was treated as a KMA for certain                           
            accounting purposes.                                                                      
                  B.  Accounting Methods and Procedures                                               
                  The accounting methods and procedures used by each KMA were                         
            prescribed by the Kroger general office.  Pertinent aspects of                            

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