Abercrombie & Fitch 2011 Annual Report Download - page 70

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ABERCROMBIE & FITCH CO.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of A&F and its subsidiaries. All
intercompany balances and transactions have been eliminated in consolidation.
CASH AND EQUIVALENTS
See Note 5, “Cash and Equivalents.”
INVESTMENTS
See Note 6, “Investments.”
RECEIVABLES
Receivables primarily include credit card receivables, construction allowances, value added tax
(“VAT”) receivables and other tax credits or refunds.
As part of the normal course of business, the Company has approximately three to four days of sales
transactions outstanding with its third-party credit card vendors at any point. The Company classifies these
outstanding balances as credit card receivables. Construction allowances are recorded for certain store lease
agreements for improvements completed by the Company. VAT receivables are payments the Company
has made on purchases of goods and services that will be recovered as sales are made to customers.
INVENTORIES
Inventories are principally valued at the lower of average cost or market utilizing the retail method.
The Company determines market value as the anticipated future selling price of merchandise less a normal
margin. An initial markup is applied to inventory at cost in order to establish a cost-to-retail ratio.
Permanent markdowns, when taken, reduce both the retail and cost components of inventory on hand so as
to maintain the already established cost-to-retail relationship. In addition to markdowns already recognized,
the Company reduces inventory value by recording a valuation reserve that represents the estimated future
anticipated selling price decreases necessary. The valuation reserve can fluctuate depending on the timing
of markdowns previously recognized. The valuation reserve was $72.3 million, $24.4 million and
$11.4 million at January 28, 2012, January 29, 2011 and January 30, 2010, respectively.
Additionally, as part of inventory valuation, inventory shrinkage estimates based on historical trends
from actual physical inventories are made each period that reduce the inventory value for lost or stolen
items. The Company performs physical inventories on a periodic basis and adjusts the shrink reserve
accordingly. The shrink reserve was $9.3 million, $7.6 million and $8.1 million at January 28,
2012, January 29, 2011 and January 30, 2010, respectively.
Ending inventory balances were $569.8 million, $385.9 million and $310.6 million at January 28,
2012, January 29, 2011 and January 30, 2010, respectively. These balances included inventory in transit
balances of $103.1 million, $55.0 million and $39.9 million at January 28, 2012, January 29, 2011 and
January 30, 2010, respectively. Inventory in transit is considered to be merchandise owned by the
Company that has not yet been received at the Company’s distribution centers.
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