Pep Boys 2013 Annual Report Download - page 117

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THE PEP BOYS—MANNY, MOE & JACK AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Years ended February 1, 2014, February 2, 2013 and January 28, 2012
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
when the awards are redeemed. The cost of the free products distributed to program members is
recorded within costs of revenues.
A portion of the Company’s transactions includes the sale of auto parts that contain a core
component. These components represent the recyclable portion of the auto part. Customers are not
charged for the core component of the new part if a used core is returned at the point of sale of the
new part; otherwise the Company charges customers a specified amount for the core component. The
Company refunds that same amount if the customer returns a used core to the store at a later date.
The Company does not recognize sales or cost of sales for the core component of these transactions
when a used part is returned by the customer at the point of sale.
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 suppliers based on purchases or for services that the Company provides to the
suppliers. These incentives received from suppliers include rebates, allowances and promotional funds
and are generally based on 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 supplier agreements and ongoing
negotiations that may be impacted in the future based on changes in market conditions, supplier
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 supplier 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 used to offset direct advertising costs were immaterial for
fiscal years 2013, 2012, and 2011.
WARRANTY RESERVE The Company provides warranties for both its merchandise sales and
service labor. Warranties for merchandise are generally covered by the respective suppliers with the
Company covering any costs above the supplier’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.
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