Interpreting Sears’ Inventory Accounting Policy The 2006 annual report of Sears Holdings…

Interpreting Sears’ Inventory Accounting Policy

The 2006 annual report of Sears Holdings Corporation (the parent of Kmart and Sears) includes the following information in the note that describes its accounting policies relating to merchandise inventories:

Merchandise inventories are valued at the lower of cost or market. For Kmart and Sears

Domestic, cost is primarily determined using the retail inventory method (“RIM”).

Kmart merchandise inventories are valued under the RIM using primarily a first-in, first-out (FIFO) cost flow assumption. Sears Domestic merchandise inventories are valued under the RIM using primarily a last-in, first-out (LIFO) cost flow assumption.

For Sears Canada, cost is determined using the average cost method, based on individual items.

Your grandfather knows that you are studying accounting and asks you what this information means.

Required

1. Sears uses the LIFO cost flow assumption for some of its inventories. Does this mean that it sells its newest merchandise first? Explain your answer.

2. Does Sears report merchandise inventories on its balance sheet at their retail value? Explain your answer.