Wal-Mart Stores, Inc. and Subsidiaries - Page 19

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          petitioners took a physical count, they adjusted any over- or               
          under-estimate of shrinkage, so that their books and records                
          reflected inventories on hand as verified by the physical count.            
          This was a continuous process throughout the year, as stores and            
          clubs were physically counted in the cycle procedure.                       
                E.  Yearend Allocations and LIFO Effects                              
                Wal-Mart estimated shrinkage for each store, not for each             
          department within each store.  At the end of each subject year,             
          Wal-Mart aggregated the estimate for shrinkage for the stub                 
          period as reported in its records for all of its stores.                    
          Wal-Mart then allocated this aggregate estimated shrinkage to               
          each department on the basis of the relative amount of all                  
          shrinkage verified during the year for each department as                   
          reported in the December purchase recap report.6  At the end of             
          each taxable year, Wal-Mart allocated the consolidated ending               
          inventory (net of shrinkage), as reported in the general journal,           
          among each of its departments.7  For the 1984, 1985, and 1986               

               6 Purchase recap reports were prepared monthly, and they               
          listed beginning inventory at retail, purchases at cost and                 
          retail, sales at retail, markdowns at retail, and ending                    
          inventory at retail.  The inventory amounts shown in the monthly            
          purchase recap reports were stated net of shrinkage (overage) as            
          determined from physical inventories taken from the beginning of            
          the year to date.  The shrinkage (overage) determined from the              
          physical inventory was included in the purchase recap report when           
          the inventory was completed, including verification and recording           
          in the books.  The shrinkage (overage) reported in the purchase             
          recap report was reported on a departmental basis from the                  
          physical counts of the departments.                                         
               7 Wal-Mart recorded purchases, sales, and related                      
                                                             (continued...)           



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