Overstock.com 2005 Annual Report Download - page 81

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Overstock.com, Inc.
Notes to Consolidated Financial Statements (Continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
Accounts receivable
Accounts receivable consist of trade amounts due from customers and from uncleared credit card transactions at period end.
Accounts receivable are recorded at invoiced amounts and do not bear interest. The Company evaluates its allowance for doubtful
accounts monthly. Account balances are written-off against the allowance when it is probable that the receivable will not be
recovered. The Company recorded an allowance for doubtful accounts of $750,000 and $1.8 million at December 31, 2004 and 2005,
respectively.
Concentration of credit risk
Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash
equivalents, investment securities, and receivables. The Company invests its cash primarily in money market, government and
corporate securities which are uninsured.
The Company's accounts receivable are derived primarily from revenue earned from customers located in the United States. The
Company maintains an allowance for doubtful accounts based upon the expected collectibility of accounts receivable.
Inventories
Inventories, consisting of merchandise purchased for resale, are accounted for using a standard costing system which
approximates the first-in-first-out ("FIFO") method of accounting, and are valued at the lower of cost or market value. The Company
establishes reserves for estimated obsolescence or damage equal to the difference between the cost of inventory and the estimated
market value based upon assumptions about future demand and market conditions. Once established, the original cost of the inventory
less the related reserve represents the new cost basis of such products. Reversal of these reserves is recognized only when the related
inventory has been sold or scrapped.
Until the time of shipping, inventory ownership related to product sales by third parties through the Company's website is
maintained by the third parties.
Prepaid inventory
Prepaid inventory represents inventory paid for in advance of receipt. Prepaid inventory at December 31, 2004 and 2005 was
$12.3 million and $9.6 million, respectively.
Prepaid expenses
Prepaid expenses represent expenses paid for prior to receipt of the related goods or services, including advertising, maintenance,
packaging, insurance and other miscellaneous costs. Total prepaid expenses at December 31, 2004 and 2005 were $3.4 million and
$8.5 million, respectively.
F-11