JCPenney 2002 Annual Report Download - page 25

J. C. Penney Company, Inc. 2002 annual report22
NOTES TO THE CONSOLIDATED
FINANCIAL STATEMENTS
1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
JCPenney was founded by James Cash Penney in 1902 and has
grown to be a major retailer, operating 1,049 JCPenney depart-
ment stores throughout the United States, Puerto Rico and
Mexico, and 54 Renner department stores in Brazil. The
Company’s Department Store and Catalog business consists of
selling family apparel, jewelry, shoes, accessories and home fur-
nishings, and providing services, such as salon, optical, portrait
photography and custom decorating, to customers through
department stores, catalog and the internet.
In addition, the Company operates a chain of 2,686 drugstores
(primarily under the Eckerd name) located throughout the
Southwest, Southeast, Sunbelt and Northeast regions of the
United States. Eckerd drugstores sell prescription drugs, over-the-
counter drugs, as well as general merchandise items such as beau-
ty and household products, photo processing services, snacks,
vitamins and baby products.
Basis of Presentation
The consolidated financial statements present the results of
J. C. Penney Company, Inc. and its subsidiaries. All significant
inter-company transactions and balances have been eliminated
in consolidation.
Effective January 27, 2002, J. C. Penney Company, Inc. changed
its corporate structure to a holding company format. As part of
this structure, J. C. Penney Company, Inc. changed its name to
J. C. Penney Corporation, Inc. (JCP) and became a wholly owned
subsidiary of a newly formed affiliated holding company
(Holding Company). The Holding Company assumed the name
J. C. Penney Company, Inc. The Holding Company has no direct
subsidiaries other than JCP. The Holding Company has no inde-
pendent assets or operations. All outstanding shares of common
and preferred stock were automatically converted into the iden-
tical number and type of shares in the Holding Company.
Stockholders’ ownership interests in the business did not change
as a result of the new structure. Shares of the Company remain
publicly traded under the same symbol (JCP) on the New York
Stock Exchange. The Holding Company is a co-obligor (or guar-
antor, as appropriate) regarding the payment of principal and
interest on JCP’s outstanding debt securities. The guarantee by
the Holding Company of certain of JCP’s outstanding debt secu-
rities is full and unconditional. The Holding Company and its
consolidated subsidiaries, including JCP, are collectively referred
to in this Annual Report as “Company” or “JCPenney,” unless indi-
cated otherwise.
Use of Estimates
The preparation of financial statements, in conformity with
generally accepted accounting principles, requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the
reporting period. While actual results could differ from these
estimates, management does not expect the differences, if any,
to have a material effect on the financial statements.
The most significant estimates relate to inventory valuation
under the retail method, specifically permanent reductions to
retail prices (markdowns) and adjustments for shortages
(shrinkage); valuation of long-lived and intangible assets,
including goodwill; and valuation allowances and reserves,
specifically those related to closed stores, workers’ compensa-
tion and general liability, environmental contingencies, income
taxes and litigation. Closed store reserves are established for the
estimated present value of lease obligations (PVOL) and other
exit costs. Workers’ compensation and general liability reserves
are based on actuarially determined estimates of claims that
have been reported, as well as those incurred but not yet
reported resulting from historical experience and current data.
Environmental remediation reserves are estimated using a range
of potential liability, based on the Company’s experience and
consultation with independent engineering firms and in-house
legal counsel, as appropriate. Income taxes are estimated for
each jurisdiction in which the Company operates. Deferred tax
assets are evaluated for recoverability, and a valuation allowance
is recorded if it is deemed more likely than not that the asset
will not be realized. Litigation reserves are based on manage-
ment’s best estimate of potential liability, with consultation of
in-house and outside counsel, and are based upon a combina-
tion of litigation and settlement strategies.
Fiscal Year
The Company’s fiscal year ends on the last Saturday in
January. Fiscal 2002 ended January 25, 2003; fiscal 2001 ended
January 26, 2002; and fiscal 2000 ended January 27, 2001. All
three years contained 52 weeks. The accounts of Renner are on
a calendar-year basis.
Reclassifications
Certain reclassifications have been made to prior year
amounts to conform to the current year presentation. None of
the reclassifications impacted the Company’s net earnings/(loss)
or earnings/(loss) per share (EPS) in any period.
Merchandise and Services Revenue Recognition
Revenue, net of any returns, is recorded at the point of sale
for retail stores and at the time of shipment for catalog, internet
and mail-order pharmacy sales. Commissions earned on sales