Dillard's 2008 Annual Report Download - page 24

(including payroll and employee benefits), insurance, employment taxes, advertising, management information
systems, legal and other corporate level expenses. Buying expenses consist of payroll, employee benefits and
travel for design, buying and merchandising personnel.
Depreciation and amortization.Depreciation and amortization expenses include depreciation and
amortization on property and equipment.
Rentals. Rentals include expenses for store leases and data processing and other equipment rentals.
Interest and debt expense, net.Interest and debt expense includes interest, net of interest income, relating
to the Company’s unsecured notes, mortgage notes, term note and the guaranteed beneficial interests in the
Company’s subordinated debentures, gains and losses on note repurchases, amortization of financing costs, call
premiums and interest on capital lease obligations.
Gain on disposal of assets. Gain on disposal of assets includes the net gain or loss on the sale or disposal of
property and equipment and joint ventures.
Asset impairment and store closing charges. Asset impairment and store closing charges consist of write-
downs to fair value of under-performing properties and exit costs associated with the closure of certain stores.
Exit costs include future rent, taxes and common area maintenance expenses from the time the stores are closed.
Equity in earnings of joint ventures. Equity in earnings of joint ventures includes the Company’s portion
of the income or loss of the Company’s unconsolidated joint ventures.
Critical Accounting Policies and Estimates
The Company’s accounting policies are more fully described in Note 1 of Notes to Consolidated Financial
Statements. As disclosed in this note, the preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America (“GAAP”) requires management to make estimates
and assumptions about future events that affect the amounts reported in the consolidated financial statements and
accompanying notes. Since future events and their effects cannot be determined with absolute certainty, actual
results will differ from those estimates.
Management of the Company believes the following critical accounting policies, among others, affect its
more significant judgments and estimates used in preparation of the Consolidated Financial Statements.
Merchandise inventory.Approximately 98% of the inventories are valued at the lower of cost or market
using the retail last-in, first-out (“LIFO”) inventory method. Under the retail inventory method (“RIM”), the
valuation of inventories at cost and the resulting gross margins are calculated by applying a calculated cost to
retail ratio to the retail value of inventories. RIM is an averaging method that is widely used in the retail industry
due to its practicality. Additionally, it is recognized that the use of RIM will result in valuing inventories at the
lower of cost or market if markdowns are currently taken as a reduction of the retail value of inventories.
Inherent in the RIM calculation are certain significant management judgments including, among others,
merchandise markon, markups, and markdowns, which significantly impact the ending inventory valuation at
cost as well as the resulting gross margins. Management believes that the Company’s RIM provides an inventory
valuation which results in a carrying value at the lower of cost or market. The remaining 2% of the inventories
are valued at the lower of cost or market using the specific identified cost method. A 1% change in markdowns
would have impacted net income by approximately $13 million for the year ended January 31, 2009.
The Company regularly records a provision for estimated shrinkage, thereby reducing the carrying value of
merchandise inventory. Complete physical inventories of all of the Company’s stores and warehouses are
performed no less frequently than annually, with the recorded amount of merchandise inventory being adjusted to
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