Dollar General 2014 Annual Report Download - page 117

10-K
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
inventory in future periods. Inventory is reviewed on a quarterly basis and adjusted to reflect write-
downs as appropriate.
Factors such as slower inventory turnover due to changes in competitors’ practices, consumer
preferences, consumer spending and unseasonable weather patterns, among other factors, could cause
excess inventory requiring greater than estimated markdowns to entice consumer purchases, resulting in
an unfavorable impact on our consolidated financial statements. Sales shortfalls due to the above
factors could cause reduced purchases from vendors and associated vendor allowances that would also
result in an unfavorable impact on our consolidated financial statements.
We calculate our shrink provision based on actual physical inventory results during the fiscal
period and an accrual for estimated shrink occurring subsequent to a physical inventory through the
end of the fiscal reporting period. This accrual is calculated as a percentage of sales at each retail
store, at a department level, and is determined by dividing the book-to-physical inventory adjustments
recorded during the previous twelve months by the related sales for the same period for each store. To
the extent that subsequent physical inventories yield different results than this estimated accrual, our
effective shrink rate for a given reporting period will include the impact of adjusting the estimated
results to the actual results. Although we perform physical inventories in virtually all of our stores on
an annual basis, the same stores do not necessarily get counted in the same reporting periods from year
to year, which could impact comparability in a given reporting period.
We believe our estimates and assumptions related to merchandise inventories have generally been
accurate in recent years and we do not currently anticipate material changes in these estimates and
assumptions.
Goodwill and Other Intangible Assets. The qualitative and quantitative assessments related to the
valuation and any potential impairment of goodwill and other intangible assets are each subject to
judgments and/or assumptions. Significant judgments required in the analysis of qualitative factors may
include determining the appropriate factors to consider and the relative importance of those factors
along with other assumptions. Significant judgments required in the quantitative testing process may
include projecting future cash flows, determining appropriate discount rates, correctly applying
valuation techniques, correctly computing the implied fair value of goodwill if necessary, and other
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