LeapFrog 2012 Annual Report Download - page 51

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LEAPFROG ENTERPRISES, INC.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data)
Revenue Recognition
The Company derives the majority of its revenue from sales of its technology-based learning products and
related proprietary and licensed 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. The Company sells App Center cards to
retailers and directly to end customers, which are redeemable on its App Center for content downloads. The
Company records 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 the Company’s App Center, the
Company recognizes 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 consist of gross sales less negotiated price allowances based primarily on volume purchasing levels,
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.
Allowances for Doubtful Accounts, Sales Returns, Defective Products and Promotions
The Company reduces gross accounts receivable by an allowance for amounts it believes 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. The provision for uncollectible accounts is included in selling, general and
administrative (‘‘SG&A’’) expense in the statements of operations. Accounts receivable are written off once
the balance is deemed to be uncollectible.
The Company also provides 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.
Cash and Cash Equivalents
Cash and cash equivalents consist of cash and money market funds with original maturities of three months
or less.
Fair Value of Financial Instruments
Fair values of the Company’s financial instruments, consisting of short-term money market funds, reflect the
estimates of exit price, or the amounts that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants as of the measurement date.
Inventory Valuation
Inventories are stated at the lower of cost or market value, on a first-in, first-out basis. The Company records
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 its products.
Inventory valuation primarily requires estimation of slow-moving, obsolete or excess products.
The Company’s estimate of write-downs for slow-moving, excess and obsolete inventories is based on
management’s review of on-hand inventories compared to their estimated future usage, product demand
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