Macy's 2014 Annual Report Download - page 57

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS — (Continued)
F-10
Net Sales
Net sales include merchandise sales, licensed department income, shipping and handling fees, sales of private brand
goods directly to third party retailers and sales of excess inventory to third parties. Sales of merchandise are recorded at the
time of delivery to the customer and are reported net of merchandise returns. 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
Cost of sales consists of the cost of merchandise, including inbound freight, and shipping and handling costs. An
estimated allowance for future sales returns is recorded and cost of sales is adjusted accordingly.
Cash and Cash Equivalents
Cash and cash equivalents include cash and liquid investments with original maturities of three months or less. Cash
and cash equivalents includes amounts due in respect of credit card sales transactions that are settled early in the following
period in the amount of $111 million at January 31, 2015 and $101 million at February 1, 2014.
Investments
The Company from time to time invests in debt and equity securities, including companies engaged in
complementary businesses. All marketable equity and debt securities held by the Company are accounted for under ASC
Topic 320, “Investments – Debt and Equity Securities.” Unrealized holding gains and losses on trading securities are
recognized in the Consolidated Statements of Income and unrealized holding gains and losses on available-for-sale
securities are included as a separate component of accumulated other comprehensive income, net of income tax effect, until
realized. At January 31, 2015, the Company did not hold any held-to-maturity or available-for-sale securities.
Receivables
In connection with the sale of most of the Company’s credit assets to Citibank, the Company and Citibank entered
into a long-term marketing and servicing alliance pursuant to the terms of a Credit Card Program Agreement (the “Program
Agreement”). Income earned under the Program Agreement is treated as a reduction of selling, general and administrative
("SG&A") expenses on the Consolidated Statements of Income. Under the Program Agreement, Citibank offers proprietary
and non-proprietary credit to the Company’s customers through previously existing and newly opened accounts.
Loyalty Programs
The Company maintains customer loyalty programs in which customers earn rewards based on their spending. Upon
reaching certain levels of qualified spending, customers automatically receive rewards to apply toward future purchases.
The Company recognizes the estimated net amount of the rewards that will be earned and redeemed as a reduction to net
sales.
Merchandise Inventories
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. At January 31,
2015 and February 1, 2014, merchandise inventories valued at LIFO, including adjustments as necessary to record
inventory at the lower of cost or market, approximated the cost of such inventories using the first-in, first-out (FIFO) retail
inventory method. The application of the LIFO retail inventory method did not result in the recognition of any LIFO
charges or credits affecting cost of sales for 2014, 2013 or 2012. 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.