O'Reilly Auto Parts 2011 Annual Report Download - page 49

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statements are presented fairly in accordance with GAAP. However, actual results could differ from our assumptions and estimates
and such differences could be material.
Inventory Obsolescence and Shrink – Inventory, which consists of automotive hard parts, maintenance items, accessories and
tools, is stated at the lower of cost or market. The extended nature of the life cycle of our products is such that the risk of
obsolescence of our inventory is minimal. The products that we sell generally have applications in our markets for a relatively
long period of time in conjunction with the corresponding vehicle population. We have developed sophisticated systems for
monitoring the life cycle of a given product and, accordingly, have historically been very successful in adjusting the volume of
our inventory in conjunction with a decrease in demand. We do record a reserve to reduce the carrying value of our inventory
through a charge to cost of sales in the isolated instances where we believe that the market value of a product line is lower than
our recorded cost. This reserve is based on our assumptions about the marketability of our existing inventory and is subject to
uncertainty to the extent that we must estimate, at a given point in time, the market value of inventory that will be sold in future
periods. Ultimately, our projections could differ from actual results and could result in a material impact to our stated inventory
balances. We have historically not had to materially adjust our obsolescence reserves due to the factors discussed above and do
not anticipate that we will experience material changes in our estimates in the future.
We also record a reserve to reduce the carrying value of our perpetual inventory to account for quantities in our perpetual records
above the actual existing quantities on hand caused by unrecorded shrink. We estimate this reserve based on the results of our
extensive and frequent cycle counting programs and periodic, full physical inventories at our stores and DCs. To the extent that
our estimates do not accurately reflect the actual unrecorded inventory shrinkage, we could potentially experience a material
impact to our inventory balances. We have historically been able to provide a timely and accurate measurement of shrink and
have not experienced material adjustments to our estimates. If unrecorded shrink changed 10% from the estimate that we
recorded based on our historical experience at December 31, 2011, the financial impact would have been approximately $1
million or 0.1% of pretax income for the year ended December 31, 2011.
Accounts Receivable – We provide credit to our commercial customers in the ordinary course of business. We estimate the
allowance for doubtful accounts on these receivables based on historical loss ratios and other relevant factors. Actual results have
consistently been within management’s expectations, and we do not believe there is a reasonable likelihood that there will be a
material change in the future that will require a significant change in the assumptions or estimates we use to calculate our
allowance for doubtful accounts. However, if actual results differ from our estimates, we may be exposed to losses or gains. If
the allowance for doubtful accounts were changed 10% from our estimated allowance at December 31, 2011, the financial impact
would have been approximately $1 million or 0.1% of pretax income for the year ended December 31, 2011.
Valuation of Long-Lived Assets and Goodwill - We evaluate the carrying value of long-lived assets for impairment whenever
events or changes in circumstances indicate the carrying value of these assets might exceed their current fair values. As part of
the evaluation, we review performance at the store level to identify any stores with current period operating losses that should be
considered for impairment. A potential impairment has occurred if the projected future undiscounted cash flows realized from the
best possible use of the asset are less than the carrying value of the asset. The estimate of cash flows includes management’s
assumptions of cash inflows and outflows directly resulting from the use of that asset in operations. If the carrying amount of an
asset exceeds its estimated future cash flows, an impairment charge is recognized for the amount by which the carrying amount of
the asset exceeds the fair value of the assets. Our impairment analyses contain estimates due to the inherently judgmental nature
of forecasting long-term estimated cash flows and determining the ultimate useful lives and fair values of the assets. Actual
results could differ from these estimates, which could materially impact our impairment assessment.
We review goodwill for impairment annually on November 30, or when events or changes in circumstances indicate the carrying
value of these assets might exceed their current fair values. We have not historically recorded an impairment to goodwill. The
process of evaluating goodwill for impairment involves the determination of the fair value of our Company using the market
approach. Inherent in such fair value determinations are certain judgments and estimates, including estimates which incorporate
assumptions marketplace participants would use in making their estimates of fair value. In the future, if events or market
conditions affect the estimated fair value to the extent that an asset is impaired, we will adjust the carrying value of these assets in
the period in which the impairment occurs, however, we do not believe there has been any change of events or circumstances that
would indicate that a reevaluation of goodwill is required as of December 31, 2011, nor do we believe goodwill is at risk of
failing impairment testing. If the price of O’Reilly stock, which was a primary input used to determine our market capitalization
during step one of goodwill impairment testing, changed by 10% from the value used during testing, the results and our
conclusions would not have changed and no further steps would have been required.
Vendor concessions – We receive concessions from our vendors through a variety of programs and arrangements, including co-
operative advertising, allowances for warranties, merchandise allowances and volume purchase rebates. Co-operative advertising
allowances that are incremental to our advertising program, specific to a product or event and identifiable for accounting
purposes, are reported as a reduction of advertising expense in the period in which the advertising occurred. All other material
vendor concessions are recognized as a reduction to the cost of inventory. Amounts receivable from vendors also include
amounts due to us relating to vendor purchases and product returns. Management regularly reviews amounts receivable from
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FORM 10-K