Dollar General 2009 Annual Report Download - page 62

• 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
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 as appropriate to reflect
write-downs determined to be necessary.
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.
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. We amortize intangible assets over their estimated useful
lives unless such lives are deemed indefinite. If impairment indicators are noted, amortizable intangible
assets are tested for impairment based on projected undiscounted cash flows, and, if impaired, written
down to fair value based on either discounted projected cash flows or appraised values. Future cash
flow projections are based on management’s projections. Significant judgments required in this testing
process may include projecting future cash flows, determining appropriate discount rates and other
assumptions. Projections are based on management’s best estimates given recent financial performance,
market trends, strategic plans and other available information and in recent years have been materially
accurate. Although not currently anticipated, changes in these estimates and assumptions could
materially affect the determination of fair value or impairment. Future indicators of impairment could
result in an asset impairment charge.
Under accounting standards for goodwill and other intangible assets, we are required to test such
assets with indefinite lives for impairment annually, or more frequently if impairment indicators occur.
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