The Kroger Company and Subsidiaries - Page 12

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                  During the years in issue, Florida Choice followed the same                         
            KFS division accounting methods and procedures utilized by the                            
            KMAs.  Florida Choice followed the shrinkage accrual practices                            
            and procedures applicable to the KFS division to determine its                            
            shrinkage accrual rate as if it were a KMA.                                               
                  During 1984, Florida Choice conducted an average of three                           
            physical inventories a store.  In 1985 and 1986, the average was                          
            two inventories a store.                                                                  
            IV.  Superx                                                                               
                  A.  General Operations                                                              
                  During the years in issue, Superx operated between 185 and                          
            621 drug and general merchandise stores.                                                  
                  Superx had its own management organization.  Superx’s                               
            management reported to corporate management in the Kroger general                         
            office.  The Kroger general office set the policies that governed                         
            the general operations of Superx.                                                         
                  B.  Accounting Methods and Procedures                                               
                        1.  Booking Rate Calculations                                                 
                  Inventory was reflected on Superx’s inventory accounts at                           
            cost and not at retail.                                                                   
                  To calculate gross income of each store (and each department                        
            within a store) for the physical-to-yearend period, Superx                                
            multiplied sales during that period by a percentage known as the                          
            “booking rate”.  That process was similar to Kroger’s retail                              

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Last modified: May 25, 2011