CarMax 2007 Annual Report Download - page 52

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BUSINESS AND BACKGROUND
CarMax, Inc. (“we”, “our”, “us”, “CarMax”, and “the company”), including its wholly owned subsidiaries, is the
largest retailer of used vehicles in the United States. We were the first used vehicle retailer to offer a large selection
of quality used vehicles at low, “no-haggle” prices using a customer-friendly sales process in an attractive, modern
sales facility. We also sell new vehicles under various franchise agreements. We provide our customers with a full
range of related services, including the financing of vehicle purchases through our own finance operation, CarMax
Auto Finance (“CAF”), and third-party lenders; the sale of extended service plans; the appraisal and purchase of
vehicles directly from consumers; and vehicle repair service. Vehicles purchased through the appraisal process that
do not meet our retail standards are sold at on-site wholesale auctions.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) Basis of Presentation and Use of Estimates
The consolidated financial statements include the accounts of CarMax and our wholly owned subsidiaries. All
significant intercompany balances and transactions have been eliminated in consolidation. The preparation of
financial statements in conformity with U.S. generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and the
disclosure of contingent assets and liabilities. Actual results could differ from those estimates.
We adopted Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share-Based
Payment” (“SFAS 123(R)”), effective March 1, 2006, applying the modified retrospective method. As a result, we
have restated prior period amounts to reflect the adoption of this standard. The impact of the adoption of SFAS
123(R) on net income for fiscal 2006 and fiscal 2005 is consistent with the pro forma amounts disclosed in our
previous annual reports to shareholders. See Note 10(C) for further discussion.
On February 22, 2007, the board of directors declared a 2-for-1 stock split in the form of a common stock dividend
for shareholders of record on March 19, 2007, which was distributed on March 26, 2007. All share and per share
data included in the consolidated financial statements and accompanying notes have been adjusted to reflect this
stock split.
(B) Cash and Cash Equivalents
Cash equivalents of $1.5 million at February 28, 2007, and $6.0 million at February 28, 2006, consisted of highly
liquid investments with original maturities of three months or less.
(C) Securitizations
The transfers of receivables associated with our automobile loan securitization program are accounted for as sales.
We retain an interest in the automobile loan receivables that we securitize. The retained interest presented on our
consolidated balance sheets includes the present value of the expected residual cash flows generated by the
securitized receivables, various reserve accounts, and an undivided ownership interest in the securitized receivables.
The retained interest is carried at fair value, and changes in fair value are included in earnings. See Notes 3 and 4
for additional discussion of securitizations.
(D) Fair Value of Financial Instruments
Due to the short-term nature and/or variable rates associated with these financial instruments, the carrying value of
our cash and cash equivalents, receivables including automobile loan receivables, accounts payable, short-term debt,
and long-term debt approximates fair value. Our retained interest in securitized receivables and derivative financial
instruments are recorded on the consolidated balance sheets at fair value.
(E) Trade Accounts Receivable
Trade accounts receivable, net of an allowance for doubtful accounts, include certain amounts due from finance
companies and customers, as well as from manufacturers for incentives and from third parties for warranty
reimbursements, and for other miscellaneous receivables. The estimate for doubtful accounts is based on historical
experience and trends.