Dillard's 2002 Annual Report Download - page 33

Notes to Consolidated Financial Statements
1. Description of Business and Summary of Significant Accounting Policies
Description of Business – Dillard’s, Inc. (the “Company”) operates retail department stores located primarily in the Southeastern,
Southwestern and Midwestern areas of the United States. The Company’s fiscal year ends on the Saturday nearest January 31 of each
year. Fiscal years 2002, 2001 and 2000 ended on February 1, 2003, February 2, 2002, and February 3, 2001, respectively. Fiscal
years 2002 and 2001 included 52 weeks and fiscal year 2000 included 53 weeks.
Consolidation – The accompanying consolidated financial statements include the accounts of Dillard’s, Inc. and its wholly owned
subsidiaries. Intercompany accounts and transactions are eliminated in consolidation. Investments in and advances to joint ventures in
which the Company has a 50% ownership interest are accounted for by the equity method.
Use of Estimates – The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include inventories, sales return, allowance for doubtful accounts, self-
insured accruals and lives of long-lived assets. Actual results could differ from those estimates.
Cash Equivalents – The Company considers all highly liquid investments with an original maturity of three months or less when
purchased to be cash equivalents.
Accounts Receivable – Customer accounts receivable are classified as current assets and include some which are due after one year,
consistent with industry practice. Credit card receivables are shown net of an allowance for uncollectible accounts. The Company
calculates the allowance for uncollectible accounts using a model that analyzes factors such as bankruptcy filings, delinquency rates,
historical charge-off patterns, recovery rates and other portfolio data. The calculation is then reviewed by management to assess
whether, based on recent economic events, additional analyses are required to appropriately estimate losses inherent in the portfolio.
The Company's current credit processing system charges off an account automatically when a customer has failed to make a required
payment in each of the six billing cycles following a missed payment. The Company also provides for the estimated uncollectible
portion of the finance charge revenue based upon our historical collection experience as part of the allowance for doubtful accounts.
This allowance represents amounts of credit card receivable balances (including billed but uncollected finance charges) which
management estimates will ultimately not be collected. Finance charge revenue is recorded until an account is charged off, at which
time uncollected finance charge revenue is recorded as a reduction of credit revenues.
The Company utilizes credit card securitizations as part of its overall funding strategy. The transfers were subject to the
grandfathering provisions of Statement of Financial Accounting Standards (“SFAS”) No. 140, “Accounting for Transfer and Servicing
of Financial Assets and Liabilities” until May 2002 and thus continued to be accounted for under the previous accounting standards
that existed under FAS 125. In May 2002, the Company amended its conduit financing agreement in a manner that prevented future
transfers of accounts receivable to its master trust from qualifying as a sale and thus receiving off-balance-sheet treatment. As a result
of this decision, the Company does not have any off-balance-sheet financing as it relates to new transfers to the Trust. Based upon the
expected average life of the credit card receivables, all financing through this facility is recorded on the balance sheet at February 1,
2003 (see Note 15).
Significant Group Concentrations of Credit Risk –The Company grants credit to customers throughout North America. There were
no Metropolitan Statistical Areas that comprised 10% of the Company’s managed credit card receivables at February 1, 2003 and
February 2, 2002.
Merchandise Inventories – The retail last-in, first-out (“LIFO”) inventory method is used to value merchandise inventories. At
February 1, 2003 and February 2, 2002, the LIFO cost of merchandise was approximately equal to the first-in, first-out (“FIFO”) cost
of merchandise.
Effective January 30, 2000, the Company changed its method of accounting for inventories under the retail inventory method. The
change principally relates to the Company’s accounting for vendor markdown allowances, from recording these allowances directly as
a reduction of cost of sales to recording such allowances as a reduction of inventoriable product cost. Historically, the vendor/retailer
arrangement provided for the Company to receive allowances from vendors when gross margin rates fell below stipulated levels.
During fiscal 2000, the Company and certain vendors revised the vendor/retailer arrangement whereby the vendors are providing up-
front allowances in the form of a fixed percentage discount off of purchases. The Company views the changes in the vendor
F-7