Pep Boys 2011 Annual Report Download - page 91

THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended January 29, 2011, January 30, 2010 and January 31, 2009
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
COSTS OF REVENUES Costs of merchandise sales include the cost of products sold, buying,
warehousing and store occupancy costs. Costs of service revenue include service center payroll and
related employee benefits, service center occupancy costs and cost of providing free or discounted
towing services to customers. Occupancy costs include utilities, rents, real estate and property taxes,
repairs, maintenance, depreciation and amortization expenses.
VENDOR SUPPORT FUNDS The Company receives various incentives in the form of discounts
and allowances from its vendors based on purchases or for services that the Company provides to the
vendors. These incentives received from vendors include rebates, allowances and promotional funds and
are generally based upon a percentage of the gross amount purchased. Funds are recorded when title
of goods purchased have transferred to the Company as the amount is known and not contingent on
future events. The amount of funds to be received are subject to vendor agreements and ongoing
negotiations that may be impacted in the future based on changes in market conditions, vendor
marketing strategies and changes in the profitability or sell-through of the related merchandise for the
Company.
Generally vendor support funds are earned based on purchases or product sales. These incentives
are treated as a reduction of inventories and are recognized as a reduction to cost of sales as the
inventories are sold. Certain vendor allowances are used exclusively for promotions and to offset
certain other direct expenses if the Company determines the allowances are for specific, identifiable
incremental expenses. Vendor support funds, which reduced advertising expense, amounted to
$2.5 million for the year ended January 28, 2012, and were immaterial for all other periods presented.
WARRANTY RESERVE The Company provides warranties for both its merchandise sales and
service labor. Warranties for merchandise are generally covered by the respective vendors, with the
Company covering any costs above the vendor’s stipulated allowance. Service labor is warranted in full
by the Company for a limited specific time period. The Company establishes its warranty reserves
based on historical experience. These costs are included in either costs of merchandise sales or costs of
service revenue in the consolidated statement of operations.
The reserve for warranty activity for the years ended January 28, 2012 and January 29, 2011,
respectively, are as follows:
(dollar amounts in thousands)
Balance, January 30, 2010.................................... $ 694
Additions related to sales in the current year ...................... 12,261
Warranty costs incurred in the current year ....................... (12,282)
Balance, January 29, 2011.................................... 673
Additions related to sales in the current year ...................... 12,122
Warranty costs incurred in the current year ....................... (12,122)
Balance, January 28,2012 .................................... $ 673
ADVERTISING The Company expenses the costs of advertising the first time the advertising
takes place. Gross advertising expense for fiscal 2011, 2010 and 2009 was $54.9 million, $57.5 million
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