Macy's 2009 Annual Report Download - page 57

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
Net sales include merchandise sales, leased department income and shipping and handling fees. The
Company licenses third parties to operate certain departments in its stores. The Company receives commissions
from these licensed departments based on a percentage of net sales. Commissions are recognized as income at the
time merchandise is sold to customers. Sales taxes collected from customers are not considered revenue and are
included in accounts payable and accrued liabilities until remitted to the taxing authorities. Cost of sales consists
of the cost of merchandise, including inbound freight, and shipping and handling costs. Sales of merchandise are
recorded at the time of delivery and reported net of merchandise returns. An estimated allowance for future sales
returns is recorded and cost of sales is adjusted accordingly.
Cash and cash equivalents include cash and liquid investments with original maturities of three months or
less. Cash and cash equivalents also includes credit card sales transactions that are settled early in the following
period and amounted to $98 million at January 30, 2010 and $79 million at January 31, 2009.
In connection with the sale of the Company’s credit assets, the Company and Citibank, N.A. entered into a
long-term marketing and servicing alliance pursuant to the terms of a Credit Card Program Agreement (the
“Program Agreement”) (see Note 7, “Receivables”). Income earned under the Program Agreement is treated as a
reduction of selling, general and administrative (“SG&A”) expenses on the Consolidated Statements of
Operations. Under the Program Agreement, Citibank offers proprietary and non-proprietary credit to the
Company’s customers through previously existing and newly opened accounts.
The Company maintains customer loyalty programs in which customers are awarded certificates based on
their spending. Upon reaching certain levels of qualified spending, customers automatically receive certificates to
apply toward future purchases. The Company expenses the estimated net amount of the certificates that will be
earned and redeemed as the certificates are earned.
Merchandise inventories are valued at lower of cost or market using the last-in, first-out (LIFO) retail
inventory method. Under the retail inventory method, inventory is segregated into departments of merchandise
having similar characteristics, and is stated at its current retail selling value. Inventory retail values are converted
to a cost basis by applying specific average cost factors for each merchandise department. Cost factors represent
the average cost-to-retail ratio for each merchandise department based on beginning inventory and the fiscal year
purchase activity. The retail inventory method inherently requires management judgments and estimates, such as
the amount and timing of permanent markdowns to clear unproductive or slow-moving inventory, which may
impact the ending inventory valuation as well as gross margins.
Permanent markdowns designated for clearance activity are recorded when the utility of the inventory has
diminished. Factors considered in the determination of permanent markdowns include current and anticipated
demand, customer preferences, age of the merchandise and fashion trends. When a decision is made to
permanently mark down merchandise, the resulting gross margin reduction is recognized in the period the
markdown is recorded.
Physical inventories are generally taken within each merchandise department annually, and inventory
records are adjusted accordingly, resulting in the recording of actual shrinkage. While it is not possible to
quantify the impact from each cause of shrinkage, the Company has loss prevention programs and policies that
are intended to minimize shrinkage. Physical inventories are taken at all store locations for substantially all
merchandise categories approximately three weeks before the end of the fiscal year. Shrinkage is estimated as a
percentage of sales at interim periods and for this approximate three-week period, based on historical shrinkage
rates.
The Company receives certain allowances from various vendors in support of the merchandise it purchases
for resale. The Company receives certain allowances as reimbursement for markdowns taken and/or to support
F-9