Family Dollar 2010 Annual Report Download - page 46

from net income and shown separately as a component of accumulated other comprehensive income within
shareholders’ equity. The Company’s short-term investment securities currently consist primarily of debt
securities such as municipal bonds, variable-rate demand notes, agency bonds, discount notes and commercial
paper. The Company’s long-term investment securities currently consist of auction rate securities. See Notes 2
and 3 for more information on the Company’s investment securities.
In addition to the cash and cash equivalents balances discussed above, the Company’s wholly-owned captive
insurance subsidiary also maintains balances in investment securities that are not designated for general corporate
purposes. These investment securities balances totaled $104.1 million as of the end of fiscal 2010 and $59.3
million as of the end of fiscal 2009.
Merchandise inventories
Inventories are valued using the retail method, based on retail prices less mark-on percentages, which
approximates the lower of first-in, first-out (FIFO) cost or market. The Company records adjustments to
inventory through cost of goods sold when retail price reductions, or markdowns, are taken against on-hand
inventory. In addition, the Company makes estimates and judgments regarding, among other things, initial
markups, markdowns, future demand for specific product categories and market conditions, all of which can
significantly impact inventory valuation. These estimates and judgments are based on the application of a
consistent methodology each period. The Company estimates inventory losses for damaged, lost or stolen
inventory (inventory shrinkage) for the period from the most recent physical inventory to the financial statement
date. The accrual for estimated inventory shrinkage is based on the trailing twelve-month actual inventory
shrinkage rate and can fluctuate from period to period based on the timing of the physical inventory counts.
Stores receive a physical inventory at least annually.
Property and equipment
Property and equipment is stated at cost. Depreciation for financial reporting purposes is calculated using the
straight-line method over the estimated useful lives of the related assets. For leasehold improvements, this
depreciation is over the shorter of the term of the related lease (generally five or ten years) or the asset’s useful
economic life.
Estimated useful lives are as follows:
Buildings and building improvements ................................ 10-40 years
Furniture, fixtures and equipment ................................... 3-10 years
Transportation equipment .......................................... 3-10 years
Leasehold improvements .......................................... 5-10 years
The Company capitalizes certain costs incurred in connection with developing, obtaining and implementing
software for internal use. Capitalized costs are amortized over the expected economic life of the assets, generally
ranging from three to eight years.
Property and equipment is reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Historically, impairment losses on fixed assets, which
typically relate to normal store closings, have not been material to the Company’s financial position or results of
operations.
Revenues
The Company recognizes revenue, net of returns and sales tax, at the time the customer tenders payment for and
takes possession of the merchandise. Sales of prepaid services such as phone cards are recorded on a net basis.
As a result, only the markup on the sales of these products is recorded as revenue.
42