Lumber Liquidators 2012 Annual Report Download - page 51

Lumber Liquidators Holdings, Inc.
Notes to Consolidated Financial Statements—(Continued)
(amounts in thousands, except share data and per share amounts)
Fair Value of Financial Instruments
The carrying amounts of financial instruments such as cash and cash equivalents, notes receivable, accounts payable and
other liabilities approximate fair value because of the short-term nature of these items. Of these financial instruments, the
cash equivalents are classified as Level 1 as defined in the Financial Accounting Standards Board (“FASB”) ASC 820 fair
value hierarchy.
Merchandise Inventories
The Company values merchandise inventories at the lower of cost or market value. Merchandise cost is determined
using the average cost method. All of the hardwood flooring purchased from vendors is either prefinished or unfinished, and
in immediate saleable form. The Company adds the finish to, and boxes, various species of unfinished product, to produce
certain proprietary products, primarily Bellawood, at its finishing facility. These finishing and boxing costs are included in
the average unit cost of related merchandise inventory. The Company maintains an inventory reserve for loss or
obsolescence, based on historical results and current sales trends. This reserve was $1,035 and $500 at December 31, 2012
and 2011, respectively.
Impairment of Long-Lived Assets
The Company evaluates potential impairment losses on long-lived assets used in operations when events and
circumstances indicate that the assets may be impaired, and the undiscounted cash flows estimated to be generated by those
assets are less than the carrying amounts of those assets. If impairment exists and the undiscounted cash flows estimated to
be generated by those assets are less than the carrying amount of those assets, an impairment loss is recorded based on the
difference between the carrying value and fair value of the assets. No impairment charges were recognized in 2012, 2011 or
2010.
Goodwill and Other Indefinite-Lived Intangibles
Goodwill represents the costs in excess of the fair value of net assets acquired associated with acquisitions by the
Company. Other assets include $800 for an indefinite-lived intangible asset for the phone number 1-800-HARDWOOD and
related internet domain names. The Company evaluates these assets for impairment on an annual basis, or whenever events
or changes in circumstance indicate that the asset carrying value exceeds its fair value. Based on the analysis performed, the
Company has concluded that no impairment in the value of these assets has occurred.
Self Insurance
The Company is self-insured for certain employee health benefit claims. The Company estimates a liability for
aggregate losses below stop-loss coverage limits based on estimates of the ultimate costs to be incurred to settle known
claims and claims not reported as of the balance sheet date. The estimated liability is not discounted and is based on a
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,
2012 and 2011, an accrual of $679 and $593 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 2012, 2011 or 2010.
The Company generally requires customers to pay a deposit, equal to approximately half 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.
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