Walmart’s warning of higher prices puts spotlight on ‘RIM accounting’ practice favored by big retailers

Retail giant Walmart is known for low prices, but those prices are about to go up. On its latest earnings call, CEO Doug McMillon and CFO John David Rainey warned that the company cannot absorb all the cost increases resulting from President Trump’s tariffs, even after some rates were reduced following negotiations. The executives said Walmart will begin raising prices on certain products as early as the end of May, with more noticeable increases expected in June.

“The level of tariffs that result from those discussions and the timing of when they ultimately become final may cause larger swings in our financial performance from one quarter to the next,” Rainey said on the May 15 call.

The veteran CFO also gave a brief lesson on Walmart’s method of accounting for the cost of inventory for the majority of its U.S. business. Known as the retail inventory method, or RIM, this practice makes these swings more difficult to forecast.

“We've always used RIM in Walmart U.S.,” Rainey said. “It's not new for us, and it's a common method of accounting in the retail industry.” RIM accounting applies a ratio of the actual cost of the inventory to its retail price to calculate ending inventory and, therefore, derive cost of goods sold, he said.

Rising prices can lead to higher inventory markups and increased margins, but later markdowns may offset these gains, Rainey explained. The resulting fluctuations in costs are unprecedented for Walmart and could cause significant swings in quarterly margins and earnings, he said.

According to Sang Hyun “Sam” Park, an associate professor at Augusta University’s Hull College of Business, U.S. GAAP gives retailers two main ways to price inventory at period-end: the use of RIM or tracking every SKU’s exact cost.

The faster, cheaper RIM shortcut

Walmart isn’t the only big box retailer to use RIM, which means the implications of see-saw tariffs on this accounting method may be wide-reaching.

RIM is popular at chains that sell millions of low-ticket items, like Walmart, Target, and Home Depot, because management already knows each product’s shelf price but not its precise landed cost until weeks later, Park told Fortune.

“By applying a single ‘cost-to-retail’ percentage to the ticket price, the accountant can finish the books quickly without scanning every purchase order,” Park explained.

Modern enterprise resource planning (ERP) systems, which automate core processes such as accounting, can handle item-level data, he said. “But for high-volume, low-margin general merchandise, the faster, cheaper RIM shortcut still wins,” Park said.

He further explained how RIM is affected by tariffs. Landed cost is the all-in amount it takes to bring goods to the shelf: a total of supplier invoice, freight, insurance, import duty (tariff), and brokerage fees. Under RIM, that amount feeds the “cost” side of the cost-to-retail ratio. Tariffs wind up squeezing the margin.

“Tariffs inflate landed cost, nudging the cost-to-retail ratio higher,” Park said of Walmart’s situation. “A quick shelf-price hike can mask that hit for a while, but markdowns later force the higher cost back into earnings.”

During the earnings call, Rainey also said he is concerned about the possibility of LIFO-related charges as prices go up. LIFO, short for Last-In, First-Out, is an inventory accounting method where the most recently purchased or produced goods are assumed to be sold first.

To address these accounting challenges, Park foresees Rainey using a new playbook when it comes to data granularity, scenario planning, and governance—but not an accounting policy overhaul.

“What Walmart’s CFO hints at is the need for supplementary tools,” he said. That includes more frequent recalibration of cost complements, layered RIM pools (such as separating tariff-sensitive imports), richer disclosure, and tighter forecasting analytics.

For the first quarter, Walmart’s revenue increased 2.5% year over year to $165.6 billion, U.S. same-store sales increased 4.5%, and its e-commerce business reached profitability for the first time.

This story was originally featured on Fortune.com