Kohl's 2011 Annual Report Download - page 30

Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the
United States requires us to make estimates and assumptions that affect the reported amounts. A discussion of the
more significant estimates follows. Management has discussed the development, selection and disclosure of these
estimates and assumptions with the Audit Committee of our Board of Directors.
Retail Inventory Method and Inventory Valuation
We value our inventory at the lower of cost or market with cost determined on the first-in, first-out
(“FIFO”) basis using the retail inventory method (“RIM”). Under RIM, the valuation of inventories at cost and
the resulting gross margins are calculated by applying a cost-to-retail ratio to the retail value of the inventories.
Inherent in the retail inventory method are certain management estimates that may affect the ending inventory
valuation as well as gross margin.
The use of RIM will generally result in inventories being valued at the lower of cost or market as
markdowns are taken as a reduction of the retail value of inventories. Management estimates the need for an
additional markdown reserve based on a review of historical clearance markdowns, current business trends,
expected vendor funding and discontinued merchandise categories.
We also record a reserve for estimated inventory shrink between the last physical inventory count and the
balance sheet date. Shrink is the difference between the recorded amount of inventory and the physical inventory.
Shrink may occur due to theft, loss, inaccurate records for the receipt of inventory or deterioration of goods,
among other things. We generally perform an annual physical inventory count at each of our stores, distribution
centers and E-Commerce fulfillment centers. The shrink reserve is based on sales and actual shrink results from
previous inventories.
We did not make any material changes in the methodologies used to value our inventory or to estimate the
markdown and shrink reserves during 2011, 2010 or 2009. We believe that we have sufficient current and
historical knowledge to record reasonable estimates for our inventory reserves. Though historical reserves have
approximated actual markdowns and shrink adjustments, it is possible that future results could differ from current
recorded reserves.
Because we routinely record permanent markdowns for potentially obsolete merchandise, we do not believe
that a markdown reserve was required as of January 28, 2012. Changes in the assumptions used to estimate our
markdown reserve requirement would not have had a material impact on our financial statements. A 10 basis
point change in estimated inventory shrink would also have had an immaterial impact on our financial
statements.
Vendor Allowances
We receive allowances from many of our merchandise vendors. These allowances often are reimbursements
for markdowns that we have taken in order to sell the merchandise and/or to support the gross margins earned in
connection with the sales of merchandise. The allowances generally relate to sold inventory or permanent
markdowns and, accordingly, are reflected as reductions to cost of merchandise sold. Allowances related to
merchandise that has not yet been sold are recorded in inventory.
We also receive vendor allowances which represent reimbursements of costs (primarily advertising) that we
have incurred to promote the vendors’ merchandise. These allowances are generally netted against advertising or
the other related costs as the costs are incurred. Advertising allowances in excess of costs incurred are recorded
as a reduction of merchandise costs.
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