Office Depot 2003 Annual Report Download - page 43

OFFICE DEPOT, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A—Summary of Significant Accounting Policies
Nature of Business: Office Depot, Inc. and subsidiaries
(the “ Company”) is a global supplier of office products and
services, with sales in 21 countries outside the United States
and Canada under the Office Depot威,Viking Office Products威,
Viking Direct威, 4Sure.com威, Guilbert威, and NiceDay娃brand
names. Products and services are offered through wholly
owned retail stores, contract business-to-business sales rela-
tionships, commercial catalogs and multiple web sites provid-
ing a wide range of office products, computers and technical
support functions.
Basis of Presentation: The consolidated financial state-
ments of Office Depot, Inc. and its subsidiaries have been
prepared in accordance with accounting principles generally
accepted in the United States of America. All intercompany
transactions have been eliminated in consolidation. Non-
controlling investments in joint ventures selling office products
and services in Mexico and Israel are accounted for using the
equity method. The Company’s share of joint ventures’opera-
tions is included in the Consolidated Statements of Earnings
in miscellaneous income (expense), net.
Certain prior year amounts have been reclassified to con-
form to current year presentation.
Fiscal Periods: Fiscal years are based on a 52- or 53-week
period ending on the last Saturday in December. All periods
presented consist of 52 weeks.
Estimates and Assumptions: Preparation of these financial
statements in conformity with accounting principles generally
accepted in the United States of America requires manage-
ment to make estimates and assumptions that affect amounts
reported in the financial statements and related notes. Actual
results may differ from those estimates.
Foreign Currency: Assets and liabilities of international
operations are translated into U.S. dollars using the exchange
rate at the balance sheet date. Revenues and expenses are
translated at average monthly exchange rates. Translation
adjustments resulting from this process are recorded in stock-
holders’ equity as a component of other comprehensive
income (loss).
Monetary assets and liabilities denominated in a currency
other than a consolidated entity’s functional currency result in
transaction gains or losses from the remeasurement at spot
rates at the end of the period. Foreign currency gains and
losses that relate to non-operational accounts, such as cash
and investments, are recorded in other income (expense), net
in the Consolidated Statements of Earnings. During 2003,
approximately $11.8 million was recognized as a foreign cur-
rency gain resulting from holding euro investments in a dollar
functional currency subsidiary in advance of the acquisition of
Guilbert. Foreign currency gains and losses on operational
accounts, such as receivables and payables, are included as a
component of operating expenses, though historically these
amounts have been immaterial.
Cash Equivalents: Highly liquid securities with maturities
of three months or less from the date of acquisition are classi-
fied as cash equivalents.
Short-term Investments: In October 2003, the Company
invested $100 million in a mutual fund that primarily invests
in U.S. Government agency obligations. This investment is
recorded as available for sale, and accordingly, changes in fair
value are recognized as a component of other comprehensive
income. Interest earned on these funds is used to purchase
additional units. At December 27, 2003 the historical cost and
fair value of this investment was $100.2 million.
Receivables: Trade receivables, net, totaled $797.7 million
and $482.5 million at December 27, 2003 and December 28,
2002, respectively. An allowance for doubtful accounts has
been recorded to reduce receivables to an amount expected to
be collectible from customers. The allowance recorded at
December 27, 2003 and December 28, 2002 was approximately
$34.2 million and $29.1 million, respectively. Receivables
generated through a private label credit card program are
transferred to financial services companies, a portion of which
have recourse to Office Depot.
The Company’s exposure to credit risk associated with
trade receivables is limited by having a large customer base that
extends across many different industries and geographic regions.
However, the Company’s receivables may be adversely affected
by an economic slowdown in the U.S. or internationally.
Other receivables, totaling $314.7 million and $289.1
million as of December 27, 2003 and December 28, 2002,
respectively, consist primarily of amounts due from vendors
under purchase rebate, cooperative advertising and various
other marketing programs.
Merchandise Inventories: Inventories are stated at the
lower of cost or market value. The weighted average method
is used to determine the cost of a majority of our inventory and
the first-in-first-out method is used for international operations.
Income Taxes: Income tax expense is recognized at appli-
cable U.S. or international tax rates. Certain revenue and
expense items may be recognized in one period for financial
statement purposes and in a different period’s income tax
return. The tax effects of such differences are reported as
deferred income taxes.
Essentially all earnings of foreign subsidiaries are
expected to be reinvested in overseas expansion. Accordingly,
no provision has been made for incremental U.S. taxes on
undistributed earnings considered permanently invested.
Cumulative undistributed earnings of our foreign subsidiaries
for which no Federal income taxes have been provided was
$1,046.2 million and $778.7 million as of December 27, 2003
and December 28, 2002, respectively.
41 Office Depot 2003 / Form 10-K