Circuit City 2003 Annual Report Download - page 22

accounting policies require the application of significant judgment by management in selecting the appropriate
assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of
uncertainty, and as a result, actual results could differ from those estimates. These judgments are based on historical
experience , observation of trends in the industry, information provided by customers and information available from
other outside sources, as appropriate. Management believes that full consideration has been given to all relevant
circumstances that we may be subject to, and the consolidated financial statements of the Company accurately reflect
management's best estimate of the consolidated results of operations, financial position and cash flows of the Company
for the years presented. Actual results may differ from these estimates under different conditions or assumptions.
Revenue Recognition.
We recognize sales based on the terms of the customer purchase order, which indicates title to the
product and risk of ownership passes to the customer upon shipment. Sales are shown net of returns and allowances.
Reserves for estimated returns and allowances are provided when sales are recorded based on historical experience and
current trends.
Accounts Receivable and Allowance for Doubtful Accounts
. We record an allowance for doubtful accounts to reflect our
estimate of the collectibility of our trade accounts receivable. We evaluate the collectibility of accounts receivable based
on a combination of factors, including an analysis of the age of customer accounts and our historical experience with
accounts receivable write-offs. The analysis also includes the financial condition of a specific customer or industry, and
general economic conditions. In circumstances where we are aware of customer charge-backs or a specific customer's
inability to meet its financial obligations, a specific reserve for bad debts applicable to amounts due to reduce the net
recognized receivable to the amount management reasonably believes will be collected is recorded. In those situations
with ongoing discussions, the amount of bad debt recognized is based on the status of the discussions. While bad debt
allowances have been within expectations and the provisions established, there can be no guarantee that we will continue
to experience the same allowance rate we have in the past.
Inventories.
We value our inventories at the lower of cost or market, cost being determined on the first-in, first-out
method. Reserves for excess and obsolete or unmarketable merchandise are provided based on historical experience,
assumptions about future product demand and market conditions. The adequacy of these reserves are evaluated
quarterly. If market conditions are less favorable than projected or if technological developments result in accelerated
obsolescence, additional write-downs may be required. While markdowns and obsolescence have been within
expectations and the provisions established, there can be no guarantee that we will continue to experience the same level
of markdowns we have in the past.
Long
-lived Assets. Management exercises judgment in evaluating our long-lived assets for impairment. We believe we
will generate sufficient undiscounted cash flow to more than recover the investments made in property, plant and
equipment. While we believe that our estimates of future cash flows are reasonable, different assumptions regarding
such cash flows could materially affect our evaluations
Income Taxes.
We are subject to taxation from federal, state and foreign jurisdictions and the determination of our tax
provision is complex and requires significant management judgment. Management judgment is also applied in the
determination of deferred tax assets and liabilities and any valuation allowances that might be required in connection
with our ability to realize deferred tax assets.
Since we conduct operations internationally, our effective tax rate has and will continue to depend upon the geographic
distribution of our pre-tax income or losses among locations with varying tax rates and rules. As the geographic mix of
our pre-
tax results among various tax jurisdictions changes, the effective tax rate may vary from period to period. We are
also subject to periodic examination from domestic and foreign tax authorities regarding the amount of taxes due. These
examinations include questions regarding the timing and amount of deductions and the allocation of income among
various tax jurisdictions. We have established, and periodically reevaluate, an estimated income tax reserve on our
consolidated balance sheet to provide for the possibility of adverse outcomes in income tax proceedings. While
management believes that we have identified all reasonably identifiable exposures and that the reserve we have
established for identifiable exposures is appropriate under the circumstances, it is possible that additional exposures exist
and that exposures may be settled at amounts different than the amounts reserved.
We account for income taxes in accordance with Statement of Financial Accounting Standards 109, “Accounting for
Income Taxes
”
,
which requires that deferred tax assets and liabilities be recognized for the effect of temporary