Home Depot 2007 Annual Report Download - page 56

Download and view the complete annual report

Please find page 56 of the 2007 Home Depot annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.

Page out of 91

  • 1
  • 2
  • 3
  • 4
  • 5
  • 6
  • 7
  • 8
  • 9
  • 10
  • 11
  • 12
  • 13
  • 14
  • 15
  • 16
  • 17
  • 18
  • 19
  • 20
  • 21
  • 22
  • 23
  • 24
  • 25
  • 26
  • 27
  • 28
  • 29
  • 30
  • 31
  • 32
  • 33
  • 34
  • 35
  • 36
  • 37
  • 38
  • 39
  • 40
  • 41
  • 42
  • 43
  • 44
  • 45
  • 46
  • 47
  • 48
  • 49
  • 50
  • 51
  • 52
  • 53
  • 54
  • 55
  • 56
  • 57
  • 58
  • 59
  • 60
  • 61
  • 62
  • 63
  • 64
  • 65
  • 66
  • 67
  • 68
  • 69
  • 70
  • 71
  • 72
  • 73
  • 74
  • 75
  • 76
  • 77
  • 78
  • 79
  • 80
  • 81
  • 82
  • 83
  • 84
  • 85
  • 86
  • 87
  • 88
  • 89
  • 90
  • 91

Accounts Receivable
The Company has an agreement with a third-party service provider who directly extends credit to customers, manages the Company's private
label credit card program and owns the related receivables. We evaluated the third-party entities holding the receivables under the program and
concluded that they should not be consolidated by the Company in accordance with the provisions of Financial Accounting Standards Board
("FASB") Interpretation No. 46(R), "Consolidation of Variable Interest Entities." The agreement with the third-party service provider expires in
2011, with the Company having the option, but no obligation, to purchase the receivables at the end of the agreement. The deferred interest
charges incurred by the Company for its deferred financing programs offered to its customers are included in Cost of Sales. The interchange fees
charged to the Company for the customers' use of the cards and the profit sharing with the third-party administrator are included in Selling,
General and Administrative expenses ("SG&A").
In addition, certain subsidiaries of the Company extend credit directly to customers in the ordinary course of business. The receivables due from
customers were $57 million and $1.8 billion as of February 3, 2008 and January 28, 2007, respectively, a decrease resulting from the sale of HD
Supply. The Company's valuation reserve related to accounts receivable was not material to the Consolidated Financial Statements of the
Company as of the end of fiscal 2007 or 2006.
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, including retail operations in Mexico and China, 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 11% 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 Consolidated Financial Statements of the Company as of the end of fiscal 2007 or 2006.
Independent physical inventory counts or cycle counts are taken on a regular basis in each store and distribution center 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 assets and liabilities and their respective tax bases. Deferred tax assets
and liabilities are measured using enacted income tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect of a change in income tax rates is recognized as income or expense in the period that includes
the enactment date.
39