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Analysis of Inventory

Difficulty: Advanced


Inventory Accounting Policy

The majority of Lowe’s inventory is stated at the lower of cost and net realizable value using the first-in, first-out method of inventory accounting. Inventory for certain subsidiaries representing approximately 10% and 8% of the consolidated inventory balances as of February 2, 2018 and February 3, 2017, respectively, are stated at lower of cost and net realizable value using other inventory methods, including the weighted average cost method and the retail inventory method. The cost of inventory includes certain costs associated with the preparation of inventory for resale, including distribution center costs, and is net of vendor funds.

Lowe’s records an inventory reserve for the anticipated loss associated with selling inventories below cost. This reserve is based on management’s current knowledge with respect to inventory levels, sales trends, and historical experience. Management does not believe Lowe’s merchandise inventories are subject to significant risk of obsolescence in the near term, and management has the ability to adjust purchasing practices based on anticipated sales trends and general economic conditions. However, changes in consumer purchasing patterns could result in the need for additional reserves. Lowe’s also records an inventory reserve for the estimated shrinkage between physical inventories. This reserve is based primarily on actual shrink results from previous physical inventories. Changes in the estimated shrink reserve are made based on the timing and results of physical inventories.

Lowe’s receives funds from vendors in the normal course of business, principally as a result of purchase volumes, sales, early payments, or promotions of vendors’ products. Generally, these vendor funds do not represent the reimbursement of specific, incremental, and identifiable costs incurred by Lowe’s to sell the vendor’s product. Therefore, Lowe’s treats these funds as a reduction in the cost of inventory, and are recognized as a reduction of cost of sales when the inventory is sold. Funds that are determined to be reimbursements of specific, incremental, and identifiable costs incurred to sell vendors’ products are recorded as an offset to the related expense. Lowe’s develops accrual rates for vendor funds based on the provisions of the agreements in place. Due to the complexity and diversity of the individual vendor agreements, Lowe’s performs analyses and reviews historical trends throughout the year and confirms actual amounts with select vendors to ensure the amounts earned are appropriately recorded. Amounts accrued throughout the year could be impacted if actual purchase volumes differ from projected annual purchase volumes, especially in the case of programs that provide for increased funding when graduated purchase volumes are met.

Source: 10-K (filing date: 2018-04-02).


Inventory Disclosure

Lowe’s Cos. Inc., Statement of Financial Position, Inventory

USD $ in millions

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Feb 2, 2018 Feb 3, 2017 Jan 29, 2016 Jan 30, 2015 Jan 31, 2014 Feb 1, 2013
Merchandise inventory, net hidden hidden hidden hidden hidden hidden

Based on: 10-K (filing date: 2018-04-02), 10-K (filing date: 2017-04-04), 10-K (filing date: 2016-03-29), 10-K (filing date: 2015-03-31), 10-K (filing date: 2014-03-31), 10-K (filing date: 2013-04-02).

Item Description The company
Merchandise inventory, net Amount after valuation and LIFO reserves of inventory expected to be sold, or consumed within one year or operating cycle, if longer. Lowe’s Cos. Inc.’s merchandise inventory, net increased from 2016 to 2017 and from 2017 to 2018.