Audiovox 1997 Annual Report Download - page 20

(1) Summary of Significant Accounting Policies
(a) Description of Business
Audiovox Corporation and its subsidiaries (the Company) design
and market cellular telephones and accessories, automotive after-
market sound and security equipment, other automotive aftermarket
accessories, and certain other products, principally in the United
States, Canada, and overseas. In addition to generating product rev-
enue from the sale of cellular telephone products, the Company’s
retail outlets, as agents for cellular carriers, are paid activation com-
missions and residual fees from such carriers.
The Company’s automotive sound, security, and accessory prod-
ucts include stereo cassette radios, compact disc players and chang-
ers, amplifiers and speakers; key based remote control security sys-
tems; cruise controls and door and trunk locks. These products are
marketed through mass merchandise chain stores, specialty automo-
tive accessory installers, distributors, and automobile dealers.
(b) Principles of Consolidation
The consolidated financial statements include the financial state-
ments of Audiovox Corporation and its wholly-owned and majority-
owned subsidiaries. All significant intercompany balances and trans-
actions have been eliminated in consolidation.
(c) Cash Equivalents
Cash equivalents of $1,337 at November 30, 1995 consisted of
short-term investments with terms of less than three months. For
purposes of the statements of cash flows, the Company considers
investments with original maturities of three months or less to be
cash equivalents.
(d) Cash Discount and Co-operative Advertising Allowances
The Company accrues for estimated cash discounts and trade and
promotional co-operative advertising allowances at the time of sale.
These discounts and allowances are reflected in the accompanying
consolidated financial statements as a reduction of accounts receiv-
able as they are utilized by customers to reduce their trade indebted-
ness to the Company.
(e) Inventory
Inventory consists principally of finished goods and is stated at
the lower of cost (primarily on a weighted moving average basis) or
market. The markets in which the Company competes are character-
ized by declining prices, intense competition, rapid technological
change and frequent new product introductions. The Company
maintains a significant investment in inventory and, therefore, is sub-
ject to the risk of losses on write-downs to market and inventory
obsolescence. During the third quarter of 1995, the Company record-
ed a charge of approximately $9,300 to accurately reflect the
Company’s inventory at the lower of cost or market. No estimate can
be made of losses that are reasonably possible should additional
write-downs to market be required in the future.
(f) Derivative Financial Instruments
The Company, as a policy, does not use derivative financial instru-
ments for trading purposes. A description of the derivative financial
instruments used by the Company follows:
(1) Forward Exchange Contracts
The Company conducts business in several foreign
currencies and, as a result, is subject to foreign currency
exchange rate risk due to the effects that exchange rate
movements of these currencies have on the Company’s costs.
To minimize the effect of exchange rate fluctuations on costs,
the Company enters into forward exchange rate contracts.
The Company, as a policy, does not enter into forward
exchange contracts for trading purposes. The forward
exchange rate contracts are entered into as hedges of inventory
purchase commitments and of trade receivables due in foreign
currencies.
Gains and losses on the forward exchange contracts that
qualify as hedges are reported as a component of the
underlying transaction. Foreign currency transactions which
have not been hedged are marked-to-market on a current
basis with gains and losses recognized through income and
reflected in other income (expense). In addition, any
previously deferred gains and losses on hedges which are
terminated prior to the transaction date are recognized in
current income when the hedge is terminated (Note 16(a)(1)).
(2) Equity Collar
The Company has an equity collar for 100,000 of its shares
in CellStar Corporation (CellStar) (Note 6). The equity collar is
recorded on the balance sheet at fair value with gains and
losses on the equity collar reflected as a separate component of
stockholders’ equity (Note 16(a)(2)). The equity collar acts as a
hedging item for the CellStar shares. Being that the item being
hedged, the CellStar shares, is an available-for-sale security
carried at fair market value with unrealized gains and losses
recorded as a separate component of stockholders’ equity, the
unrealized gains and losses on the equity collar are also
recorded as a separate component of stockholders’ equity.
(g) Investment Securities
The Company classifies its debt and equity securities in one of
three categories: trading, available-for-sale, or held-to-maturity.
Trading securities are bought and held principally for the purpose of
selling them in the near term. Held-to-maturity securities are those
securities in which the Company has the ability and intent to hold the
security until maturity. All other securities not included in trading or
held-to-maturity are classified as available-for-sale.
Trading and available-for-sale securities are recorded at fair value.
Held-to-maturity securities are recorded at amortized cost, adjusted
for the amortization or accretion of premiums or discounts.
Unrealized holding gains and losses on trading securities are includ-
ed in earnings. Unrealized holding gains and losses, net of the relat-
ed tax effect, on available-for-sale securities are excluded from earn-
ings and are reported as a separate component of stockholders’ equi-
ty until realized. Realized gains and losses from the sale of available-
for-sale securities are determined on a specific identification basis.
A decline in the market value of any available-for-sale or held-to-
maturity security below cost that is deemed other than temporary
results in a reduction in carrying amount to fair value. The impair-
ment is charged to earnings and a new cost basis for the security is
AUDIOVOX CORPORATION AND SUBSIDIARIES
N o t e s t o C o n s o l i d a t e d F i n a n c i a l S t a t e m e n t s
November 30, 1997, 1996 and 1995
(Dollars in thousands, except share and per share data)
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