CarMax 2006 Annual Report Download - page 44

42 CARMAX 2006
(K) Store Opening Expenses
Costs related to store openings, including preopening costs, are expensed as incurred.
(L) Income Taxes
The company files a consolidated federal income tax return for a majority of its subsidiaries. Certain subsidiaries
are required to file separate partnership or corporate federal income tax returns. Deferred income taxes reflect the
impact of temporary differences between the amounts of assets and liabilities recognized for financial reporting
purposes and the amounts recognized for income tax purposes, measured by applying currently enacted tax
laws. A deferred tax asset is recognized if it is more likely than not that a benefit will be realized. Changes in tax
laws and tax rates are reflected in the income tax provision in the period in which the changes are enacted.
(M) Revenue Recognition
The company recognizes revenue when the earnings process is complete, generally either at the time of sale to
a customer or upon delivery to a customer. As part of its customer service strategy, the company guarantees the
vehicles it sells with a 5-day, money-back guarantee. If a customer returns the vehicle purchased within the
parameters of the guarantee, the company will refund the customer’s money. A reserve for returns is recorded
based on historical experience and trends.
The company sells extended service plans on behalf of unrelated third parties. These service plans have
terms of coverage from 12 to 72 months. Because the third parties are the primary obligors under these service
plans, commission revenue is recognized at the time of sale, net of a reserve for estimated customer returns of
the service plans. The reserve for returns is based on historical experience and trends.
(N) Advertising Expenses
All advertising costs are expensed as incurred. Advertising expenses are included in selling, general, and
administrative expenses in the company’s consolidated statements of earnings.
(O) Net Earnings Per Share
Basic net earnings per share is computed by dividing net earnings by the weighted average number of shares of
common stock outstanding. Diluted net earnings per share is computed by dividing net earnings by the sum of
the weighted average number of shares of common stock outstanding and dilutive potential common stock.
(P) Stock-Based Compensation
The company accounts for its stock-based compensation plans under the recognition and measurement
principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to
Employees,” and related interpretations. Under this opinion and related interpretations, compensation expense
is recorded on the date of grant and amortized over the vesting period only if the market value of the
underlying stock on the grant date exceeds the exercise price. Compensation expense for employee stock
options is not reflected in the company’s net earnings, as options granted under its plans had exercise prices
equal to the market value of the underlying common stock on the date of grant. The following table illustrates
the effect on net earnings and net earnings per share as if the fair-value-based method of accounting prescribed
by SFAS No. 123, “Accounting for Stock-Based Compensation,” had been applied to all outstanding stock
awards in each reported period.
PROFORMA NET EARNINGS AND NET EARNINGS PER SHARE
Years Ended February 28 or 29
(In thousands except per share data) 2006 2005 2004
Net earnings, as reported .................................................................... $148,055 $112,928 $116,450
Stock-based compensation expense included in net earnings,
net of related tax effects ................................................................. 33 66 75
Total additional stock-based compensation expense determined
under the fair-value-based method for all awards, net of
related tax effects............................................................................ (13,808) (11,567) (6,834)
Pro forma net earnings........................................................................ $134,280 $101,427 $109,691
Net earnings per share:
Basic, as reported ........................................................................... $ 1.41 $ 1.09 $ 1.13
Basic, pro forma ............................................................................. $ 1.28 $ 0.97 $ 1.06
Diluted, as reported........................................................................ $ 1.39 $ 1.07 $ 1.10
Diluted, pro forma ......................................................................... $ 1.27 $ 0.97 $ 1.04