Dick's Sporting Goods 2003 Annual Report Download - page 32

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CRITICAL ACCOUNTING POLICIES AND USE OF ESTIMATES
The Company’s significant accounting policies are described in Note 1 of the Consolidated Financial Statements,
which were prepared in accordance with accounting principles generally accepted in the United States of America.
Critical accounting policies are those that the Company believes are both most important to the portrayal of the
Company’s financial condition and results of operations, and require the Company’s most difficult, subjective or
complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently
uncertain. Judgments and uncertainties affecting the application of those policies may result in materially different
amounts being reported under different conditions or using different assumptions.
The Company considers the following policies to be the most critical in understanding the judgments that are involved
in preparing its consolidated financial statements.
Inventory Valuation The Company values inventory using the lower of weighted average cost or market method. Market
price is generally based on the current selling price of the merchandise. The Company regularly reviews inventories to
determine if the carrying value of the inventory exceeds market value and the Company records a reserve to reduce the
carrying value to its market price, as necessary. Historically, the Company has rarely experienced significant occurrences
of obsolescence or slow-moving inventory. However, future changes such as customer merchandise preference,
unseasonable weather patterns, or business trends could cause the Company’s inventory to be exposed to obsolescence
or slow-moving merchandise.
Shrink expense is accrued as a percentage of merchandise sales based on historical shrink trends. The Company
performs physical inventories at the stores and distribution center throughout the year. The reserve for shrink represents
an estimate for shrink for each of the Company’s locations since the last physical inventory date through the reporting
date. Estimates by location and in the aggregate are impacted by internal and external factors and may vary
significantly from actual results.
Vendor Allowances Vendor allowances include allowances, rebates and cooperative advertising funds received from
vendors. These funds are determined for each fiscal year and the majority are based on various quantitative contract terms.
Amounts expected to be received from vendors relating to the purchase of merchandise inventories are recognized as a
reduction of cost of goods sold as the merchandise is sold. Amounts that represent a reimbursement of costs incurred,
such as advertising, are recorded as a reduction to the related expense in the period that the related expense is incurred.
The Company records an estimate of earned allowances based on the latest projected purchase volumes and advertising
forecasts. On an annual basis, the Company confirms earned allowances with vendors to ensure the amounts are recorded
in accordance with the terms of the contract.
In November 2002, the FASB issued Emerging Issues Task Force Issue No. 02-16 (“Issue 02-16”), “Accounting by
a Reseller for Cash Consideration Received from a Vendor.” Issue 02-16 addresses the issue of how a reseller of a
vendor’s product should account for cash consideration received from a vendor. The adoption of Issue 02-16, effective
with agreements entered into after November 21, 2002, did not have a material impact on the Company’s consolidated
financial position or results of operations.
Impairment of Assets The Company reviews long-lived assets whenever events and circumstances indicate that the
carrying value of these assets may not be recoverable based on estimated undiscounted future cash flows. Assets are
reviewed at the lowest level for which cash flows can be identified, which is the store level. In determining future cash
flows, significant estimates are made by the Company with respect to future operating results of each store over its
remaining lease term. If such assets are considered to be impaired, the impairment to be recognized is measured by
the amount by which the carrying amount of the assets exceeds the fair value of the assets.
Self-Insurance The Company is self-insured for certain losses related to health, workers’ compensation and general
liability insurance, although we maintain stop-loss coverage with third-party insurers to limit our liability exposure. Liabilities
associated with these losses are estimated in part by considering historical claims experience, industry factors, severity
factors and other actuarial assumptions.