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Sam's physical inventory procedure was essentially the
same as Wal-Mart's procedure, except that Sam's conducted its
inventories before business hours and the physical count was
completed within 4 to 5 hours. In addition, two inventories were
usually taken during the taxable year at each of Sam's clubs, and
the items, rather than retail values, were counted. Physical
counts were sometimes taken at Sam's in January, and the results
of physical inventories at Sam's were booked the day after the
physical inventory. Unlike the records of Wal-Mart, petitioners
kept records for Sam's that listed the quantity and cost of items
in inventory on any given date.
In addition to the physical inventories performed at each
club, Sam's personnel routinely performed item audits on specific
products held in inventory. In an item audit, Sam's personnel
counted the goods on hand for a particular SKU's, and they
reconciled the count with the club's stock status report. Any
discrepancy was immediately booked. Item audits were performed
daily or weekly at the club manager's discretion.
III. Accounting for Shrinkage
A. Shrinkage in General
Inventory shrinkage occurs daily and is an inherent cost
of the retail business. Causes of shrinkage include theft,
damage, breakage, spoilage, and bookkeeping errors. Although
shrinkage cannot be eliminated entirely, it can be minimized
through methods that include the use of loss prevention
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