Napa Auto Parts 2005 Annual Report Download - page 29

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1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business
Genuine Parts Company and all of its majority-owned
subsidiaries (the Company) is a distributor of automotive
replacement parts, industrial replacement parts, office
products and electrical/electronic materials. The Company
serves a diverse customer base through more than 1,900
locations in North America and, therefore, has limited exposure
from credit losses to any particular customer, region, or industry
segment. The Company performs periodic credit evaluations
of its customers’ financial condition and generally does not
require collateral.
Principles of Consolidation
The consolidated financial statements include all of the accounts
of the Company. Income applicable to minority interests is
included in selling, administrative and other expenses. Significant
intercompany accounts and transactions have been eliminated
in consolidation.
Use of Estimates
The preparation of the consolidated financial statements in
conformity with accounting principles generally accepted in the
United States requires management to make estimates and
assumptions that affect the amounts reported in the consoli-
dated financial statements and accompanying notes. Actual
results may differ from those estimates and the differences
could be material.
Revenue Recognition
The Company recognizes revenues from product sales upon
shipment to its customers.
Foreign Currency Translation
The consolidated balance sheets and statements of income of
the Company’s foreign subsidiaries have been translated into
U.S. dollars at the current and average exchange rates, respec-
tively.The foreign currency translation adjustment is included
as a component of accumulated other comprehensive income.
Cash and Cash Equivalents
The Company considers all highly liquid investments with
maturities of three months or less when purchased to be cash
and cash equivalents.
Trade Accounts Receivable and
the Allowance for Doubtful Accounts
The Company evaluates the collectibility of trade accounts
receivable based on a combination of factors. Initially,the
Company estimates an allowance for doubtful accounts as a
percentage of net sales based on historical bad debt experi-
ence. This initial estimate is periodically adjusted when the
Company becomes aware of a specific customer’s inability to
meet its financial obligations (e.g., bankruptcy filing) or as a
result of changes in the overall aging of accounts receivable.
While the Company has a large customer base that is geo-
graphically dispersed, a general economic downturn in any of
the industry segments in which the Company operates could
result in higher than expected defaults, and, therefore, the
need to revise estimates for bad debts. For the years ended
December 31, 2005, 2004, and 2003, the Company recorded
provisions for bad debts of approximately $16,356,000,
$20,697,000, and $23,800,000, respectively. At December 31,
2005 and 2004, the allowance for doubtful accounts was
approximately $11,386,000 and $12,793,000, respectively.
Merchandise Inventories, including
Consideration Received from Vendors
Merchandise inventories are valued at the lower of cost or
market. Cost is determined by the last-in, first-out (LIFO) method
for a majority of automotive parts, electrical/electronic materials,
and industrial parts, and by the first-in, first-out (FIFO) method
for office products and certain other inventories. If the FIFO
method had been used for all inventories, cost would have been
approximately $272,631,000 and $226,914,000 higher than
reported at December 31, 2005 and 2004, respectively.
The Company identifies slow moving or obsolete inventories and
estimates appropriate provisions related thereto. Historically,
these losses have not been significant as the vast majority of the
Company’s inventories are not highly susceptible to obsolescence
and are eligible for return under various vendor return programs.
While the Company has no reason to believe its inventory return
privileges will be discontinued in the future, its risk of loss associ-
ated with obsolete or slow moving inventories would increase if
such were to occur.
The Company enters into agreements at the beginning of each
year with many of its vendors providing for inventory purchase
incentives and advertising allowances. Generally,the Company
earns inventory purchase incentives and advertising allowances
upon achieving specified volume purchasing levels or other
criteria. The Company accrues for the receipt of inventory
purchase incentives and advertising allowances as part of its
inventory cost based on cumulative purchases of inventory to
date and projected inventory purchases through the end of
the year,or, in the case of specific advertising allowances,
upon completion of the Company’s obligations related thereto.
While management believes the Company will continue to
receive consideration from vendors in 2006 and beyond, there
can be no assurance that vendors will continue to provide com-
parable amounts of incentives and allowances in the future.
Notes to Consolidated Financial Statements
December 31, 2005