Merchandise Inventories

The substantial majority of our merchandise inventories are stated at the lower of cost (first-in, first-out) or market, as determined by the retail inventory method, which is based on a number of factors such as markups, markdowns, and inventory losses (or shrink). As the inventory retail value is adjusted regularly to reflect market conditions, inventory valued using the retail method approximates the lower of cost or market. Certain subsidiaries, including retail operations in Canada and Mexico, and distribution centers, record merchandise inventories at the lower of cost or net realizable value, as determined by a cost method. These merchandise inventories represent approximately 29% of the total merchandise inventories balance. We evaluate the inventory valued using a cost method at the end of each quarter to ensure that it is carried at the lower of cost or net realizable value. The valuation allowance for merchandise inventories valued under a cost method was not material to our consolidated financial statements at the end of fiscal 2019 or fiscal 2018.

Independent physical inventory counts or cycle counts are taken on a regular basis in each store and distribution center to ensure that amounts reflected in merchandise inventories are properly stated. Shrink (or in the case of excess inventory, swell) is the difference between the recorded amount of inventory and the physical inventory. We calculate shrink based on actual inventory losses occurring as a result of physical inventory counts during each fiscal period and estimated inventory losses occurring between physical inventory counts. The estimate for shrink occurring in the interim period between physical inventory counts is calculated on a store-specific basis based on recent shrink results and current trends in the business.

The Home Depot. (25 March 2020) Annual Report. Retrieved from https://www.sec.gov/cgi-bin/viewer?action=view&cik=354950&accession_number=0000354950-20-000015&xbrl_type=v#.

Required: Answer each of the following questions

1. How would HDs Consolidated Balance Sheets and Consolidated Statements of Earnings (their income statement) be different if HD had adopted a LIFO cost flow assumption 20 years ago? What accounts are likely to be different? In what direction?
2. When HD calculates shrink after an inventory count, how should it be recorded? Identify the affected accounts and directions as specifically as possible.