Home Depot 2005 Annual Report Download - page 53

Cash Equivalents
The Company considers all highly liquid investments purchased with maturities of three months or less
to be cash equivalents. The Company’s Cash and Cash Equivalents are carried at fair market value and
consist primarily of high-grade commercial paper, money market funds, U.S. government agency
securities and tax-exempt notes and bonds.
Short-Term Investments
Short-Term Investments at the end of fiscal 2004 are primarily auction rate securities. The interest rates
on these securities are typically reset to market prevailing rates every 35 days or less, and in all cases
every 90 days or less, but have longer stated maturities. Short-Term Investments are recorded at fair
value based on current market rates and are classified as available-for-sale. Changes in the fair value
are included in Accumulated Other Comprehensive Income (Loss), net of applicable taxes in the
accompanying Consolidated Financial Statements.
Accounts Receivable
The Company has an agreement with a third-party service provider who manages the Company’s
private label credit card program and directly extends credit to customers. In addition, certain
subsidiaries of the Company extend credit directly to customers in the ordinary course of business. The
receivables due from customers were $865 million and $321 million as of January 29, 2006 and
January 30, 2005, respectively. The Company’s valuation reserve related to accounts receivable was not
material as of January 29, 2006 and January 30, 2005.
Merchandise Inventories
The majority of the Company’s Merchandise Inventories are stated at the lower of cost (first-in,
first-out) or market, as determined by the retail inventory method. As the inventory retail value is
adjusted regularly to reflect market conditions, the inventory valued using the retail method
approximates the lower of cost or market. Certain subsidiaries and distribution centers record
Merchandise Inventories at the lower of cost (first-in, first-out) or market, as determined by the cost
method. These Merchandise Inventories represent approximately 14% of the total Merchandise
Inventories balance. The Company evaluates the inventory valued using the cost method at the end of
each quarter to ensure that it is carried at the lower of cost or market. The valuation allowance for
Merchandise Inventories valued under the cost method was not material to the Company as of the end
of fiscal 2005 and fiscal 2004.
Independent physical inventory counts or cycle counts are taken on a regular basis in each store,
distribution center and Home Depot Supply location to ensure that amounts reflected in the
accompanying Consolidated Financial Statements for Merchandise Inventories are properly stated.
During the period between physical inventory counts in stores, the Company accrues for estimated
losses related to shrink on a store-by-store basis based on historical shrink results and current trends in
the business. Shrink (or in the case of excess inventory, ‘‘swell’’) is the difference between the recorded
amount of inventory and the physical inventory. Shrink may occur due to theft, loss, inaccurate records
for the receipt of inventory or deterioration of goods, among other things.
Income Taxes
The Company provides for federal, state and foreign income taxes currently payable, as well as for
those deferred due to timing differences between reporting income and expenses for financial statement
purposes versus tax purposes. Federal, state and foreign tax benefits are recorded as a reduction of
income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statement carrying amounts of existing
41