CompUSA 2008 Annual Report Download - page 80

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Product Warranties – Provisions for estimated future expenses relating to product warranties for the Company’ s assembled
PCs are recorded as cost of sales when revenue is recognized. Liability estimates are determined based on management
judgment considering such factors as the number of units sold, historical and anticipated rates of warranty claims and the
likely current cost of corrective action. The changes in accrued product warranties were as follows:
Year ended December 31
2008 2007 2006
Balance, beginning of year $914 $1,061 $1,316
Charged to expense 1,145 1,400 1,556
Deductions (1,366) (1,547) (1,811)
Balance, end of year $693 $914 $1,061
Income Taxes – Deferred tax assets and liabilities are recognized for the effect of temporary differences between the book
and tax bases of recorded assets and liabilities and for tax loss carry forwards.The realization of net deferred tax assets is
dependent upon our ability to generate sufficient future taxable income. Where it is more likely than not that some portion
or of the deferred tax asset will not be realized, we have provided a valuation allowance. If the realization of those deferred
tax assets in the future is considered more likely than not, an adjustment to the deferred tax assets would increase net
income in the period such determination is made.
The Company provides for uncertain tax positions and related interest and penalties based upon management’ s assessment
of whether a tax benefit is more likely than not to be sustained upon examination by tax authorities. To the extent the
Company prevails in matters for which a liability for an unrecognized tax benefit is established or is required to pay
amounts in excess of the liability, the Company’ s effective tax rate in a given financial statement period may be affected.
Revenue Recognition and Accounts Receivable – The Company recognizes sales of products, including shipping revenue,
when persuasive evidence of an order arrangement exists, delivery has occurred, the sales price is fixed or determinable and
collectability is reasonably assured. Generally, these criteria are met at the time the product is received by the customers
when title and risk of loss have transferred. Allowances for estimated subsequent customer returns, rebates and sales
incentives are provided when revenues are recorded. Costs incurred for the shipping and handling of its products are
recorded as cost of sales. Revenue from extended warranty and support contracts on the Company’ s assembled PCs is
deferred and recognized over the contract period. The Company evaluates collectability of accounts receivable based on
numerous factors, including past transaction history with customers and their credit rating and provides a reserve for
accounts that are potentially uncollectible. Trade receivables are generally written off once all collection efforts have been
exhausted. Accounts receivable are shown in the consolidated balance sheets net of allowances for doubtful collections and
subsequent customer returns.
Advertising Costs – Expenditures for internet, television and local radio advertising are expensed in the period the
advertising takes place. Catalog preparation, printing and postage expenditures are amortized over the period of catalog
distribution during which the benefits are expected, generally one to six months.
Net advertising expenses were $40.0 million, $47.2 million and $37.4 million during 2008, 2007 and 2006, respectively and
are included in the accompanying Consolidated Statements of Operations. 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. The Company
accounts for consideration from vendors as a reduction of cost of sales unless certain conditions are met showing that the
funds are used for specific, incremental, identifiable costs, in which case the consideration is accounted for as a reduction in
the related expense category, such as advertising expense. The amount of vendor consideration recorded as a reduction of
selling, general and administrative expenses totaled $60.4 million, $42.6 million and $39.6 million during 2008, 2007 and
2006, respectively.
Prepaid expenses as of December 2008 and 2007 include deferred advertising costs of $4.1 million and $3.9 million which
are reflected as an expense during the periods benefited, typically the subsequent fiscal quarter.
Stock based compensation – The Company records share-based payment awards exchanged for employee services at fair
value on the date of grant and expenses the awards in the consolidated statement of operations over the requisite employee
service period. Stock-based compensation expense includes an estimate for forfeitures and is recognized over the expected
term of the award on a straight-line basis. The Company recorded, as a component of selling, general and administrative
expenses, amortization of stock-based compensation of $3,220,000, $3,435,000, and $1,756,000 in 2008, 2007 and 2006,
respectively. (See Note 7)
Net Income Per Common Share – Net income per common share basic is calculated based upon the weighted average
number of common shares outstanding during the respective periods presented. Net income per common share diluted is
calculated based upon the weighted average number of common shares outstanding and included the equivalent shares for
dilutive securities outstanding during the respective periods, where the effect is anti-dilutive. The dilutive effect of
outstanding options issued by the Company is reflected in net income 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 period exceeds the exercise price of the options. Equivalent common shares of 941,000, 1,087,000, and 989,000