Family Dollar 2012 Annual Report Download - page 50

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Investment securities
The Company classifies all investment securities as available-for-sale. Securities accounted for as
available-for-sale are required to be reported at fair value with unrealized gains and losses, net of taxes, excluded
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, and variable-rate demand notes. 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 were $30.0 million as of the end of fiscal 2012 and $93.0 million
as of the end of fiscal 2011.
Restricted cash and investments
The Company has restricted cash and investments that serve as collateral for certain of the Company’s insurance
obligations. These restricted funds cannot be withdrawn from the Company’s account without the consent of the
secured party. As of August 25, 2012, the Company held $55.3 million in this restricted account, of which $45.9
million was included in Restricted Cash and Investments and $9.4 million was included in Other Assets in the
Consolidated Balance Sheets. The classification between current and non-current is based on the timing of
expected payments of the secured insurance obligations. Previously, these obligations were collateralized using
standby letters of credit under our revolving credit facilities.
Additionally, in conjunction with the sale-leaseback transactions completed during the second half of fiscal 2012,
certain proceeds from the transactions were placed into an escrow account with an independent third party in
connection with like-kind exchange transactions, which permits the deferral of a portion of the tax gain
associated with the sale of the stores. The Company intends to use these proceeds to purchase additional new
stores and must do so within 180 days from the closing of the transactions to realize the deferral. At the
Company’s option, the proceeds can be returned for general operating needs; however, the tax gain deferral
would not be realized. As of August 25, 2012, the balance in this account was $80.4 million. These assets are
classified as Restricted Cash and Investments in the Consolidated Balance Sheets.
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 conduct 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
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