Circuit City 2003 Annual Report Download - page 50

Balance, beginning of year $11,275 $11,120 $15,329
Charged to expense 3,906 4,581 3,696
Deductions (5,181) (4,426) (7,905)
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Balance, end of year $10,000 $11,275 $11,120
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Advertising Costs
- Direct response advertising costs, consisting primarily of catalog preparation, printing and
postage expenditures are amortized over the period of catalog distribution during which the benefits are expected.
Advertising expenditures relating to the Company's national advertising campaign and other television advertising
costs are expensed in the period the advertising takes place.
Advertising costs, net of rebates from vendors, of $43.7 million in 2003, $44.1 million in 2002 and $53.0 million
in 2001 are included in the accompanying Consolidated Statements of Operations. Effective January 1, 2003 the
Company adopted Emerging Issues Task Force ("EITF") Issue No. 02-16, "Accounting by a Customer (Including
a Reseller) for Certain Consideration Received from a Vendor." EITF 02-16 requires that consideration received
from vendors, such as advertising support funds, be accounted for as a reduction of cost of sales unless certain
conditions are met showing that the funds are used for a specific program entirely funded by an individual vendor.
If these specific requirements related to individual vendors are met, the consideration is accounted for as a
reduction in the related expense category, such as advertising expense. EITF 02-16 applies to all agreements
modified or entered into on or after January 1, 2003. The Company utilizes advertising programs to support
vendors, including catalogs, internet and magazine advertising, and receives payments and credits from vendors,
including consideration pursuant to volume incentive programs and cooperative marketing programs. As a result
of prospectively adopting EITF 02-16, the Company has recorded $14.5 million for the year ended December 31,
2003 of vendor consideration as a reduction of cost of sales. Adopting EITF 02-
16 had no impact on income (loss)
from operations, as the vendor consideration recorded as a reduction of cost of sales would previously have been
recorded as a reduction of advertising expense.
Prepaid expenses at December 31, 2003 and 2002 include deferred advertising costs of $4.2 million and $3.6
million, respectively, which are reflected as an expense during the periods benefited, typically the subsequent
fiscal quarter.
Research and Development Costs
- Costs incurred in connection with research and development are expensed as
incurred. Such expenses for the years ended December 31, 2003, 2002 and 2001 aggregated approximately
$800,000, $1,036,000 and $1,539,000, respectively.
Derivative Financial Instruments
- The Company adopted SFAS 133, "Accounting for Derivative Instruments and
Hedging Activities", as amended, effective January 1, 2001. SFAS 133 requires that all derivative financial
instruments be recognized as either assets or liabilities in the balance sheet based on their fair values. Changes in
the fair values are required to be reported in earnings or other comprehensive income depending on the use of the
derivative and whether it qualifies for hedge accounting. Derivative instruments are designated and accounted for
as either a hedge of a recognized asset or liability (fair value hedge) or a hedge of a forecasted transaction (cash
flow hedge). For derivatives designated as effective cash flow hedges, changes in fair values are recognized in
other comprehensive income. Changes in fair values related to fair value hedges as well as the ineffective portion
of cash flow hedges are recognized in earnings (see Note 6).
The Company does not use derivative instruments for speculative or trading purposes. Derivative instruments may
be used to manage exposures related to changes in foreign currency exchange rates and interest rate risk on
variable rate indebtedness.
Net Income (Loss) Per Common Share
- The Company calculates net income (loss) per share in accordance with
SFAS 128, "Earnings Per Share". Net income (loss) per common share-basic was calculated based upon the
weighted average number of common shares outstanding during the respective periods presented. Net income
(loss) per common share-diluted was calculated based upon the weighted average number of common shares
outstanding and included the equivalent shares for dilutive options outstanding during the respective periods
except in loss periods, where the effect is anti-dilutive. The dilutive effect of outstanding options issued by the
Company are reflected in net income (loss) per share –
diluted using the treasury stock method. Under the treasury
stock method, options will only have a dilutive effect when the average market price of common stock during the