Dollar General 2005 Annual Report Download - page 41

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of presentation and accounting policies
Basis of presentation
These notes contain references to the years 2006,
2005, 2004 and 2003, which represent fiscal years ending
or ended February 2, 2007, February 3, 2006, January 28,
2005 and January 30, 2004, respectively. Fiscal year 2006
will be, and each of 2004 and 2003 was, a 52-week
accounting period while 2005 was a 53-week accounting
period.The Company’s fiscal year ends on the Friday
closest to January 31. The consolidated financial state-
ments include all subsidiaries of the Company, except
for its not-for-profit subsidiary the assets and revenues
of which are not material. Intercompany transactions have
been eliminated.
The Company leases four of its distribution centers
(“DCs”) from lessors, which meet the definition of a
Variable Interest Entity (“VIE”) as described by FASB
Interpretation No. 46,“Consolidation of Variable Interest
Entities”(“FIN 46”), as revised.Two of these DCs have been
recorded as financing obligations whereby the property
and equipment, along with the related lease obligations,
are reflected in the consolidated balance sheets. The other
two DCs, excluding the equipment, have been recorded as
operating leases in accordance with SFAS No. 98,
“Accounting for Leases.” The Company is not the primary
beneficiary of these VIEs and, accordingly, has not included
these entities in its consolidated financial statements.
Business description
The Company sells general merchandise on a
retail basis through 7,929 stores (as of February 3, 2006)
located primarily in the southern, southwestern,
midwestern and eastern United States. The Company has
DCs in Scottsville, Kentucky; Ardmore, Oklahoma; South
Boston, Virginia; Indianola, Mississippi; Fulton, Missouri;
Alachua, Florida; Zanesville, Ohio; and Jonesville, South
Carolina. The Company also has a DC under construction
in Marion, Indiana.
The Company purchases its merchandise from a wide
variety of suppliers. Approximately 11% of the Company’s
purchases in 2005 were made from Procter and Gamble.
No other supplier accounted for more than 3% of the
Company’s purchases in 2005.
Cash and cash equivalents
Cash and cash equivalents include highly liquid
investments with insignificant interest rate risk and
original maturities of three months or less when
purchased. Such investments primarily consist of money
market funds, certificates of deposit and commercial
paper. The carrying amounts of these items are a
reasonable estimate of their fair value due to the short
maturity of these investments.
Payments due from banks for third-party credit card,
debit card and electronic benefit transactions (“EBT”) clas-
sified as cash and cash equivalents totaled approximately
$7.8 million and $4.8 million at February 3, 2006 and
January 28, 2005, respectively.
The Company’s cash management system provides
for daily investment of available balances and the funding
of outstanding checks when presented for payment.
Outstanding but unpresented checks totaling approximately
$124.2 million and $112.3 million at February 3, 2006 and
January 28, 2005, respectively, have been included in Accounts
payable in the consolidated balance sheets. Upon presenta-
tion for payment, these checks are funded through available
cash balances or the Company’s existing credit facility.
The Company has certain cash and cash equivalents
balances that are subject to restrictions and are not avail-
able for general corporate purposes, as further described
below under “Investments in debt and equity securities.”
Investments in debt and equity securities
The Company accounts for its investment in debt and
marketable equity securities in accordance with Statement
of Financial Accounting Standards (“SFAS”) No. 115,
“Accounting for Certain Investments in Debt and Equity
Securities,” and accordingly, classifies them as held-to-
maturity, available-for-sale, or trading. Debt securities
categorized as held-to-maturity are stated at amortized
cost. Debt and equity securities categorized as available-
for-sale are stated at fair value, with any unrealized
gains and losses, net of deferred income taxes, reported
as a component of Accumulated other comprehensive
loss. Trading securities (primarily mutual funds held
pursuant to deferred compensation and supplemental
retirement plans, as further discussed in Note 8) are
stated at fair value, with changes in fair value recorded
in income as a component of Selling, general and
administrative (“SG&A”) expense.
In general, the Company invests excess cash in short-
er-dated, highly liquid investments such as money market
funds, certificates of deposit, and commercial paper.
Depending on the type of securities purchased (debt ver-
sus equity) as well as the Company’s intentions with
respect to the potential sale of such securities before their
stated maturity dates, such securities have been classified
as held-to-maturity or available-for-sale. Given the short
maturities of such investments (except for those securities
described in further detail below), the carrying amounts
approximate the fair values of such securities.