Dollar General 2013 Annual Report Download - page 120

total cost of $26.8 million including associated premiums. A portion of the July 2011 redemption of
senior notes due 2015 was financed by borrowings under our senior secured revolving credit facility.
Net borrowings under such facility were $184.7 million during 2011. In December 2011, we repurchased
4.9 million outstanding shares of our common stock at a total cost of $185.0 million.
Critical Accounting Policies and Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to
make estimates and assumptions that affect reported amounts and related disclosures. In addition to
the estimates presented below, there are other items within our financial statements that require
estimation, but are not deemed critical as defined below. We believe these estimates are reasonable and
appropriate. However, if actual experience differs from the assumptions and other considerations used,
the resulting changes could have a material effect on the financial statements taken as a whole.
Management believes the following policies and estimates are critical because they involve
significant judgments, assumptions, and estimates. Management has discussed the development and
selection of the critical accounting estimates with the Audit Committee of our Board of Directors, and
the Audit Committee has reviewed the disclosures presented below relating to those policies and
estimates. See Note 1 to the consolidated financial statements for a detailed discussion of our principal
accounting policies.
Merchandise Inventories. Merchandise inventories are stated at the lower of cost or market
(‘‘LCM’’) with cost determined using the retail last in, first out (‘‘LIFO’’) method. We use the retail
inventory method (‘‘RIM’’) to calculate gross profit and the resulting valuation of inventories at cost,
which are computed by applying a calculated cost-to-retail inventory ratio to the retail value of sales at
a department level. The RIM is an averaging method that has been widely used in the retail industry
due to its practicality. Also, the use of the RIM will result in valuing inventories at LCM if markdowns
are currently taken as a reduction of the retail value of inventories. Inherent in the retail inventory
method calculation are certain significant management judgments and estimates including, among
others, initial markups, markdowns, and shrinkage, which significantly impact the gross profit
calculation as well as the ending inventory valuation at cost. These significant estimates, coupled with
the fact that the RIM is an averaging process, can, under certain circumstances, produce distorted cost
figures. Factors that can lead to distortion in the calculation of the inventory balance include:
• applying the RIM to a group of products that is not fairly uniform in terms of its cost and
selling price relationship and turnover;
• applying the RIM to transactions over a period of time that include different rates of gross
profit, such as those relating to seasonal merchandise;
• inaccurate estimates of inventory shrinkage between the date of the last physical inventory at a
store and the financial statement date; and
• inaccurate estimates of LCM and/or LIFO reserves.
Factors that reduce potential distortion include the use of historical experience in estimating the
shrink provision (see discussion below) and an annual LIFO analysis whereby all SKUs are considered
for inclusion in the index formulation. An actual valuation of inventory under the LIFO method is
made at the end of each year based on the inventory levels and costs at that time. Accordingly, interim
LIFO calculations are based on management’s estimates of expected year-end inventory levels, sales for
the year and the expected rate of inflation/deflation for the year and are thus subject to adjustment in
the final year-end LIFO inventory valuation. We also perform interim inventory analysis for
determining obsolete inventory. Our policy is to write down inventory to an LCM value based on
various management assumptions including estimated markdowns and sales required to liquidate such
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