Nordstrom 2008 Annual Report Download - page 39

Nordstrom, Inc. and subsidiaries 39
Nordstrom, Inc.
Notes to Consolidated Financial Statements
Dollar and share amounts in millions except per share and per option amounts
Advertising
Production costs for newspaper, radio and other media are expensed the first time the advertisement is run. Total advertising expenses, net of vendor
allowances, of $98, $101 and $109 in 2008, 2007 and 2006 were included in selling, general and administrative expenses.
Other Income and Expense, Net
On May 1, 2007, we converted our Nordstrom private label card and Nordstrom VISA credit card programs into one securitization program. Prior to the
transaction, other income and expense, net consisted primarily of earnings from our investment in asset backed securities and securitization gains and
losses, which were both generated from the Nordstrom VISA credit card program.
Gift card breakage is another component of other income and expense, net. Based on an analysis of our program since its inception in 1999, we
determined that balances remaining on cards issued beyond five years ago are unlikely to be redeemed and therefore may be recognized as income.
Breakage income was $7, $6 and $5 in 2008, 2007 and 2006. This breakage income is approximately 3.5% of the amount initially issued as gift cards.
Stock-Based Compensation
We recognize stock-based compensation expense on a straight-line basis over the requisite service period. The total compensation expense is reduced
by estimated forfeitures expected to occur over the vesting period of the award. We estimate the fair value of stock options granted using the Binomial
Lattice option valuation model. We believe that this model provides a better estimate of fair value than the Black-Scholes option valuation model, as it
can accommodate variability in assumptions for expected volatility, dividends and risk-free interest rates. Refer to Note 12: Shareholders’ Equity and
Stock Compensation Plans for additional information on our stock option plans and related stock-based compensation expense.
Cash Equivalents
Cash equivalents are short-term investments with a maturity of three months or less from the date of purchase and are carried at amortized cost,
which approximates fair value. Our cash management system provides for the reimbursement of all major bank disbursement accounts on a daily
basis. Accounts payable at the end of 2008 and 2007 included $66 and $46 of checks not yet presented for payment drawn in excess of our bank
deposit balances.
Supplemental Cash Flow Information
Fiscal year 2008 2007 2006
Cash paid during the year for:
Interest (net of capitalized interest) $145 $75 $55
Income taxes 340 478 449
Statement of Cash Flows Correction
Subsequent to the issuance of our 2007 Annual Report on Form 10-K, we determined that beginning in the second quarter of 2007, cash flows arising
from VISA originations and repayments for sales outside of Nordstrom are more properly defined as an investing activity rather than an operating
activity within our consolidated statements of cash flows. As a result, net cash used in operating activities and net cash used in investing activities in
the accompanying consolidated statement of cash flows for 2007 have been corrected from the amounts previously reported as follows:
Fiscal year 2007
As
previously
reported
As
corrected
Operating Activities:
Change in accounts receivable $(1,234) $(1,083)
Net cash provided by operating activities 161 312
Investing Activities:
Change in accounts receivable originated at third parties — (151)
Net cash used in investing activities (270) (421)