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NEW YORK - Kmart Corp.'s declining sales at the end of 2001 caused it to lose credits it already had used to reduce reported costs during the year, people familiar with the situation told The Wall Street Journal.
Kmart's internal review of its past accounting procedures now is focusing in part on its practice of recording in advance the credits, known as vendor allowances, according to Dow Jones news wire. Kmart logged the vendor allowances --- which were granted as discounts or rebates -- on a quarterly basis, fully expecting to receive them at the close of its fiscal year ended Jan. 30. But some of the allowances depended on the retailer achieving a certain level of sales. Kmart's sales tumbled during the fourth quarter, and vendors responded by withholding some of the allowances Kmart already had recorded during the prior three quarters.
By recording partial allowances throughout the year, Kmart reported lower costs and thus boosted the income reported on its earnings statements for earlier quarters. That would have worked fine had Kmart met its goals and received the allowances at year end.