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the items in and value of the ending inventory. The cost of
goods sold is the residual amount. No distinction is made
between the cost of the goods that were actually sold during the
period and the expense of shrinkage.
Under the perpetual system, the cost and/or quantity of
goods sold are contemporaneously recorded at or about the time of
sale. Thus, the perpetual system continuously reveals the cost
and/or quantity of goods sold since the beginning of the current
period and the cost and/or quantity of goods that are (or should
be) on hand at any given time. Physical inventory counts are
performed periodically to confirm the accuracy of the inventory
as stated in the taxpayer's books, and adjustments are made to
the books to reconcile the inventory stated therein with the
actual inventory.
B. Petitioners' Inventory Accounting Method
Petitioners maintained a perpetual inventory system.
Wal-Mart used the Last In, First Out (LIFO) method of identifying
items in ending inventory, see sec. 1.472-1, Income Tax Regs.,
and the retail method of pricing inventories, see sec. 1.471-8,
Income Tax Regs.4 Wal-Mart determined the cost of the LIFO
inventories using the dollar value LIFO method, see sec. 1.472-8,
Income Tax Regs., and it valued any increase in inventory
quantities based on the cost of the earliest acquisitions during
4 Many of Wal-Mart's competitors also used the retail
inventory method to account for their inventories.
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Last modified: May 25, 2011