LeapFrog 2012 Annual Report Download - page 38

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
Our financial statements and accompanying notes are prepared in accordance with GAAP. Preparing financial
statements requires management to make estimates and assumptions that affect the reported amounts of assets,
liabilities, revenue, and expenses. We believe that certain accounting policies, which we refer to as critical
accounting policies, are particularly important to the portrayal of our financial position and results of
operations and require the use of significant estimates and the application of significant judgment by our
management. On an on-going basis, we evaluate our estimates, particularly those related to our critical
accounting policies.
The following discussion highlights those policies and the underlying estimates and assumptions, which we
consider critical to an understanding of the financial information in this report.
Revenue Recognition, Allowance for Doubtful Accounts, and Other Accounts Receivable and
Revenue Reserves
We derived the majority of our revenue from sales of our technology-based learning products and related
proprietary content. Revenue is recognized when products are shipped and title passes to the customer,
provided that there is evidence of a commercial arrangement, delivery has occurred, there is a fixed or
determinable fee and collection is reasonably assured. We sell App Center cards to retailers and directly to end
customers, which are redeemable on our App Center for content downloads. We record proceeds from the
initial sale of the card to deferred revenue, which are then recognized into revenue when the right to
download content is granted to the customer upon redemption of the card. For content purchased by the
customer with a personal credit card directly through our App Center, we recognize revenue when the right to
download content is granted. Amounts billed to customers for shipping and handling costs are recognized as
revenue. Costs incurred to ship merchandise from warehouse facilities are recorded in cost of sales.
Net sales represent gross sales less estimated sales returns, allowances for defective products, promotional
markdowns, chargebacks and price changes, and cooperative promotional arrangements. Correspondingly,
these allowances are recorded as reductions of gross accounts receivable.
We reduce our gross accounts receivable balance by an allowance for amounts we believe may become
uncollectible. This allowance is an estimate based primarily on management’s evaluation of the customer’s
financial condition in the context of current economic conditions, past collection history and aging of the
accounts receivable balances. Determining such allowance requires judgment, the result of which may have a
significant effect on the amounts reported in accounts receivable. If changes in the economic climate or in the
financial condition of any of our customers impair or improve their ability to make payments, adjustments to
the allowances may be required.
We also provide estimated allowances against revenue and accounts receivable for sales returns, defective
products, promotional markdowns, chargebacks and price changes, and cooperative promotional arrangements
in the same period that the related revenue is recorded. The allowances are estimated utilizing historical
information, maximum known exposures and other available information including current retailer inventory
levels, sell-through of its retailers and distributors, current trends in retail for its products, changes in customer
demand for its products and other related factors.
Accounts receivable are reported on the balance sheet net of all provided allowances, which included the
allowances for doubtful accounts of $0.3 million and $0.7 million as of December 31, 2012 and
2011, respectively.
Inventory Valuation
Inventories are stated at the lower of cost or market value, on a first-in, first-out basis. We record inventory
costs on the balance sheet based on third-party contract manufacturer invoices, which include the contract
manufacturers’ costs for materials, labor and manufacturing overhead related to our products. Inventory
valuation primarily requires estimation of slow-moving, obsolete or excess products. Our estimate of the
write-downs for slow-moving, excess and obsolete inventories is based on management’s review of on-hand
inventories compared to their product demand forecast, anticipated product selling prices, the expected product
lifecycle, and products planned for discontinuation. If actual future demand for our products and anticipated
product selling prices were less favorable than those projected by our management, additional inventory
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