Lumber Liquidators 2011 Annual Report Download - page 54

Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
(amounts in thousands, except share data and per share amounts)
number of assumptions and factors including historical trends, actuarial assumptions and economic conditions. This liability
could be affected if future occurrences and claims differ from these assumptions and historical trends. As of December 31,
2011 and 2010, an accrual of $593 and $446 related to estimated claims was included in other current liabilities, respectively.
Recognition of Net Sales
The Company recognizes net sales for products purchased at the time the customer takes possession of the merchandise.
Service revenue, primarily freight charges for in-home delivery, is included in net sales and recognized when the service has
been rendered. The Company reports sales exclusive of sales taxes collected from customers and remitted to governmental
taxing authorities, and net of an allowance for anticipated sales returns based on historical and current sales trends and
experience. The sales returns allowance and related changes were not significant for 2011, 2010 or 2009.
The Company generally requires customers to pay a deposit, equal to approximately 50% of the retail sales value, when
purchasing merchandise inventories not regularly carried in a given store location, or not currently in stock. These deposits
are included in customer deposits and store credits until the customer takes possession of the merchandise.
Cost of Sales
Cost of sales includes the net cost of the product sold, the transportation costs from vendor to the Company’s
distribution center or store location, any applicable finishing costs related to production of the Company’s proprietary brands,
the transportation costs from the distribution center to the store locations, any inventory adjustments, including shrinkage,
and the net costs to produce samples.
The Company includes transportation costs for the delivery of products directly from stores to customers in cost of sales
if delivered by third parties or in selling, general and administrative expenses (“SG&A”) if delivered by the Company’s
delivery fleet in prior years. Costs related to the Company’s delivery fleet, which include delivery salaries, maintenance and
depreciation, totaled approximately nil in 2011, $115 in 2010 and $577 in 2009.
The Company offers a range of prefinished products with warranties on the durability of the finish ranging from 10 to
100 years. Warranty reserves are based primarily on claims experience, sales history and other considerations, and warranty
costs are recorded in cost of sales. Warranty costs and changes to the warranty reserve were not significant for 2011, 2010 or
2009.
Vendor Allowances
Vendor allowances primarily consist of volume rebates that are earned as a result of attaining certain purchase levels,
reimbursement for the cost of producing samples, advertising allowances for the promotion of vendors’ products and support
for new store openings. The vendor allowances are accrued as earned, with those allowances received as a result of attaining
certain purchase levels accrued over the incentive period based on estimates of purchases.
Volume rebates earned are initially recorded as a reduction in merchandise inventories and a subsequent reduction in
cost of sales when the related product is sold. Reimbursement received for the cost of producing samples is recorded as an
offset against cost of sales. Advertising allowances and support for new store openings are recorded as an offset against
SG&A.
Advertising Costs
Advertising costs charged to SG&A were $52,345, $49,797 and $47,305 in 2011, 2010 and 2009, respectively. The
Company uses various types of media to brand its name and advertise its products. Media production costs are generally
expensed as incurred, except for direct mail, which is expensed when the finished piece enters the postal system. Media
placement costs are generally expensed in the month the advertising occurs, except for contracted endorsements and sports
agreements, which are generally expensed ratably over the contract period. Amounts paid in advance are included in prepaid
expenses and totaled $818 and $1,227 at December 31, 2011 and 2010, respectively.
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