Dell 2004 Annual Report Download - page 45

Table of Contents
recognized in the period the sale occurs, based upon the relative fair value of the portion sold and the portion allocated to retained interests.
Warranty — Dell records warranty liabilities at the time of sale for the estimated costs that may be incurred under its basic limited warranty. The
specific warranty terms and conditions vary depending upon the product sold and country in which Dell does business, but generally includes
technical support, repair parts, labor, and a period ranging from 90 days to three years. Factors that affect Dell's warranty liability include the
number of installed units currently under warranty, historical and anticipated rates of warranty claims on those units, and cost per claim to
satisfy Dell's warranty obligation. Each quarter, Dell reevaluates its estimates to assess the adequacy of its recorded warranty liabilities and
adjusts the amounts as necessary.
Shipping Costs — Dell's shipping and handling costs are included in cost of sales in the accompanying consolidated statement of income for all
periods presented.
Selling, General, and Administrative — Selling expenses include items such as sales commissions, marketing and advertising costs, and
contractor services. Advertising costs are expensed as incurred and were $576 million, $473 million, and $426 million during fiscal 2005, 2004,
and 2003, respectively. General and administrative expenses include items for Dell's administrative functions, such as Finance, Legal, Human
Resources, and information technology support. These functions include costs for items such as salaries, maintenance and supplies, insurance,
depreciation expense, and allowance for doubtful accounts.
Research, Development, and Engineering Costs — Research, development, and engineering costs are expensed as incurred, in accordance
with SFAS No. 2, Accounting for Research and Development Costs. Research, development, and engineering expenses primarily include
payroll and headcount related costs, contractor fees, infrastructure costs, and administrative expenses directly related to research and
development support.
Website Development Costs — Dell expenses the costs of maintenance and minor enhancements to the features and functionality of its
websites.
Income Taxes — Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax basis of
assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse.
Earnings Per Common Share — Basic earnings per share is based on the weighted effect of all common shares issued and outstanding, and is
calculated by dividing net income by the weighted average shares outstanding during the period. Diluted earnings per share is calculated by
dividing net income by the weighted average number of common shares used in the basic earnings per share calculation plus the number of
common shares that would be issued assuming exercise or conversion of all potentially dilutive common shares outstanding. Dell excludes
equity instruments from the calculation of diluted weighted average shares outstanding if the effect of including such instruments is antidilutive
to earnings per share. Accordingly, certain employee stock options and equity put contracts (during fiscal 2003) have been excluded from the
calculation of diluted weighted average shares totaling 103 million, 138 million, and 192 million shares during fiscal 2005, 2004, and 2003,
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