Aarons 2004 Annual Report Download - page 26

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Notes to Consolidated Financial Statements
Note A: Summary of Significant
Accounting Policies
As of December 31, 2004 and 2003, and for the
Years Ended December 31, 2004, 2003 and 2002.
Basis of Presentation — The consolidated financial state-
ments include the accounts of Aaron Rents, Inc. and its
wholly owned subsidiaries (the Company). All significant
intercompany accounts and transactions have been eliminat-
ed. The preparation of the Company’s consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported
in these financial statements and accompanying notes. Actual
results could differ from those estimates. Generally, actual
experience has been consistent with management’s prior
estimates and assumptions. Management does not believe
these estimates or assumptions will change significantly in
the future absent unsurfaced or unforeseen events.
On July 12, 2004, the Company announced a 3-for-2
stock split effected in the form of a 50% stock dividend on
both Common Stock and Class A Common Stock. New
shares were distributed on August 16, 2004 to shareholders
of record as of the close of business on August 2, 2004. All
share and per share information has been restated for all
periods presented to reflect this stock dividend.
On July 21, 2003, the Company announced a 3-for-2
stock split effected in the form of a 50% stock dividend on
both Common Stock and Class A Common Stock. New
shares were distributed on August 15, 2003 to shareholders
of record as of the close of business on August 1, 2003. All
share and per share information has been restated for all
periods presented to reflect this stock dividend.
Certain amounts presented for prior years have been
reclassified to conform to the current year presentation.
Line of Business — The Company is engaged in the
business of renting and selling residential and office furniture,
consumer electronics, appliances, computers, and other
merchandise throughout the U.S., Puerto Rico, and Canada.
The Company manufactures furniture principally for its
rent-to-rent and sales and lease ownership operations.
Cash — In prior balance sheet and statement of cash
flow presentations, checks outstanding were classified as a
reduction to cash. Since the financial institutions with checks
outstanding and those with deposits on hand did not and do
not have legal right of offset, we have reclassified checks out-
standing in certain zero balance bank accounts to accounts
payable at December 31, 2004 and for all consolidated
balance sheets and consolidated statements of cash flows
presented. This reclassification has the effect of increasing
both cash and accounts payable and accrued expenses by
$4.6 million, $3.8 million, and $6.7 million for the years
ended December 31, 2003, 2002, and 2001, respectively.
Certain transactions previously reflected as a reduction of
book value of rental merchandise sold or disposed in the
accompanying consolidated statements of cash flows for the
years ended December 31, 2003 and 2002 are reflected as an
addition to rental merchandise for the year ended December
31, 2004. These transactions have been reclassified in the
accompanying consolidated statements of cash flows to
conform with the current period presentation, resulting in
increases in both additions to rental merchandise and book
value of rental merchandise sold or disposed of $10.6 million
and $9.8 million for the years ended December 31, 2003 and
2002, respectively.
Rental Merchandise consists primarily of residential and
office furniture, consumer electronics, appliances, computers,
and other merchandise and is recorded at cost. The sales and
lease ownership division depreciates merchandise over the
rental agreement period, generally 12 to 24 months when on
rent and 36 months when not on rent, to a 0% salvage value.
The rent-to-rent division depreciates merchandise over its
estimated useful life, which ranges from 6 months to 60
months, net of its salvage value, which ranges from 0% to
60% of historical cost. Our policies require weekly rental
merchandise counts by store managers, which include write-
offs for unsalable, damaged, or missing merchandise inven-
tories. Full physical inventories are generally taken at our
distribution and manufacturing facilities on a quarterly basis,
and appropriate provisions are made for missing, damaged
and unsalable merchandise. In addition, we monitor rental
merchandise levels and mix by division, store, and fulfillment
center, as well as the average age of merchandise on hand. If
unsalable rental merchandise cannot be returned to vendors,
it is adjusted to its net realizable value or written off.
All rental merchandise is available for rental or sale.
On a monthly basis, we write off damaged, lost or unsalable
merchandise as identified. Effective September 30, 2004,
we began recording rental merchandise adjustments on the
allowance method. In connection with the adoption of this
method, we recorded a one-time adjustment of approximate-
ly $2.5 million to establish a rental merchandise allowance
reserve. We expect rental merchandise adjustments in the
future under this new method to be materially consistent
with the prior year’s adjustments under the direct-write-off
method. Inventory write-offs, including the effect of the
establishment of the reserve mentioned above, totaled
approximately $18.0 million, $11.9 million, and $10.1 mil-
lion during the years ended December 31, 2004, 2003, and
2002, respectively, and are included in operating expenses in
the accompanying consolidated statements of earnings.
Property, Plant and Equipment are recorded at cost.
Depreciation and amortization are computed on a straight-
line basis over the estimated useful lives of the respective
assets, which are from 8 to 40 years for buildings and
improvements and from 1 to 5 years for other depreciable
property and equipment. Gains and losses related to
dispositions and retirements are recognized as incurred.
Maintenance and repairs are also expensed as incurred;
renewals and betterments are capitalized. Depreciation
expense — included in operating expenses in the accom-
panying consolidated statements of earnings — for plant,
property, and equipment approximated $22.2 million,
$19.2 million, and $16.4 million during the years ended
December 31, 2004, 2003, and 2002, respectively.
Goodwill and Other Intangibles — Goodwill represents the
excess of the purchase price paid over the fair value of the
net assets acquired in connection with business acquisitions.