Dillard's 2010 Annual Report Download - page 23

Advertising, selling, administrative and general expenses. Advertising, selling, administrative and
general expenses include buying, occupancy, selling, distribution, warehousing, store and corporate
expenses (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 subordinated
debentures, gains and losses on note repurchases, amortization of financing costs 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.
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 losses of joint ventures. Equity in losses of joint ventures includes the Company’s
portion of the income or loss of the Company’s unconsolidated joint ventures, including the equity in
earnings of CDI prior to the purchase of its remaining interest and subsequent consolidation on
August 29, 2008.
Critical Accounting Policies and Estimates
The Company’s accounting policies are also 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. The Company evaluates its estimates
and judgments on an ongoing basis and predicates those estimates and judgments on historical
experience and on various other factors that are believed to be reasonable under the circumstances.
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 97% of the inventories are valued at the lower of cost or
market using the last-in, first-out retail inventory method (‘‘LIFO RIM’’). Under LIFO 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. LIFO 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
LIFO 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 LIFO RIM calculation are
certain significant management judgments including, among others, merchandise markon, markups, and
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