Wal-Mart Stores, Inc. and Subsidiaries - Page 10

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          could use cycle counting because:  (1) Wal-Mart had accurate                
          retail accounting records, (2) Wal-Mart had retained independent            
          counting services to work with Wal-Mart's internal audit                    
          department, and (3) Wal-Mart's previous physical inventories had            
          not required significant changes to the retail records.  E&Y                
          certified that petitioners' financial statements for the subject            
          years (which included the shrinkage estimates) conformed with               
          Generally Accepted Accounting Principles (GAAP), issuing                    
          unqualified opinions to that effect for each of the years.  E&Y             
          had been periodically reviewing petitioners' methodology for                
          accounting for shrinkage, including the accrual of the shrinkage            
          estimate during the stub period, and E&Y had never recommended              
          that petitioners change their method of accounting for shrinkage.           
                D.  Physical Counts                                                   
                The amount of shrinkage or overage was verified by                    
          petitioners when the inventory on hand was counted.  In general,            
          Wal-Mart counted each store's inventory approximately every 11 to           
          13 months.  In the case of new stores, petitioners did not count            
          the inventory until the store had been open for at least                    
          6 months.  Petitioners also did not count inventory in the months           
          of November, December, and the first week in January.  During               
          November and December, Wal-Mart was focusing on the Christmas               
          season, which is one of the busiest times of the year, and its              
          inventory was at a maximum.  During the first week of January,              
          Wal-Mart's employees were recuperating from the Christmas season,           




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