Foot Locker 2011 Annual Report Download - page 61

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FOOT LOCKER, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Summary of Significant Accounting Policies − (continued)
Potential common shares include the dilutive effect of stock options and restricted stock units. Options to
purchase 3.8 million, 4.5 million, and 6.3 million shares of common stock at January 28, 2012,
January 29, 2011, and January 30, 2010, respectively, were not included in the computations because the
exercise price of the options was greater than the average market price of the common shares and,
therefore, the effect of their inclusion would be antidilutive. Contingently issuable shares of 0.9 million
have not been included as the vesting conditions have not been satisfied.
Share-Based Compensation
The Company recognizes compensation expense in the financial statements for share-based awards based
on the grant date fair value of those awards. Additionally, stock-based compensation expense includes an
estimate for pre-vesting forfeitures and is recognized over the requisite service periods of the awards. See
Note 21, Share-Based Compensation, for information on the assumptions the Company used to calculate the
fair value of share-based compensation.
Upon exercise of stock options, issuance of restricted stock or units, or issuance of shares under the
employees stock purchase plan, the Company will issue authorized but unissued common stock or use
common stock held in treasury. The Company may make repurchases of its common stock from time to
time, subject to legal and contractual restrictions, market conditions, and other factors.
Cash and Cash Equivalents
Cash equivalents at January 28, 2012 and January 29, 2011 were $830 million and $675 million,
respectively. Included in these amounts are $191 million and $165 million of short-term deposits as of
January 28, 2012 and January 29, 2011, respectively. The Company considers all highly liquid investments
with original maturities of three months or less, including commercial paper and money market funds, to
be cash equivalents. Additionally, amounts due from third party credit card processors for the settlement
of debit and credit card transactions are included as cash equivalents as they are generally collected within
three business days.
Investments
Changes in the fair value of available-for-sale securities are reported as a component of accumulated other
comprehensive loss in the Consolidated Statements of Shareholders’ Equity and are not reflected in the
Consolidated Statements of Operations until a sale transaction occurs or when declines in fair value are
deemed to be other-than-temporary. The Company routinely reviews available-for-sale securities for
other-than-temporary declines in fair value below the cost basis, and when events or changes in
circumstances indicate the carrying value of a security may not be recoverable, the security is written
down to fair value. The Company’s auction rate security was valued at $5 million for both January 28, 2012
and January 29, 2011. See Note 19, Fair Value Measurements, for further discussion of these investments.
Merchandise Inventories and Cost of Sales
Merchandise inventories for the Company’s Athletic Stores are valued at the lower of cost or market using
the retail inventory method. Cost for retail stores is determined on the last-in, first-out (‘‘LIFO’’) basis for
domestic inventories and on the first-in, first-out (‘‘FIFO’’) basis for international inventories. The retail
inventory method is commonly used by retail companies to value inventories at cost and calculate gross
margins due to its practicality. Under the retail inventory method, cost is determined by applying a
cost-to-retail percentage across groupings of similar items, known as departments. The cost-to-retail
percentage is applied to ending inventory at its current owned retail valuation to determine the cost of
ending inventory on a department basis. The Company provides reserves based on current selling prices
when the inventory has not been marked down to market. Merchandise inventories of the
Direct-to-Customers business are valued at the lower of cost or market using weighted-average cost, which
approximates FIFO. Transportation, distribution center, and sourcing costs are capitalized in merchandise
inventories. The Company expenses the freight associated with transfers between its store locations in the
period incurred. The Company maintains an accrual for shrinkage based on historical rates.
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