Petsmart 2012 Annual Report Download - page 54

F-8
Under our cash management system, a bank overdraft balance exists for our primary disbursement accounts. This overdraft
represents uncleared checks in excess of cash balances in the related bank accounts. Our funds are transferred on an as-needed
basis to pay for clearing checks. As of February 3, 2013, and January 29, 2012, bank overdrafts of $16.1 million and $53.8 million,
respectively, were included in accounts payable and bank overdraft in the Consolidated Balance Sheets.
Restricted Cash
Our stand-alone letter of credit facility agreement allows us to issue letters of credit for guarantees provided for insurance
programs. We are required to maintain a cash deposit with the lender for outstanding letter of credit issuances, as detailed in Note
11.
Vendor Allowances for Advertising
We receive vendor allowances from agreements made with certain merchandise suppliers, primarily in the form of advertising
funding agreements. These vendor allowances are specifically related to identifiable advertising costs to promote and sell vendor
products, and are recorded as a reduction of operating, general and administrative expenses in the Consolidated Statements of
Income and Comprehensive Income. We establish a receivable for vendor allowances that are earned but not yet received. Vendor
allowances remaining in receivables in the Consolidated Balance Sheets were not material as of February 3, 2013, and January 29,
2012.
Merchandise Inventories and Valuation Reserves
Merchandise inventories represent finished goods and are recorded at the lower of cost or market. Cost is determined by the
moving average cost method and includes inbound freight, as well as certain procurement and distribution costs related to the
processing of merchandise.
We have established reserves for estimated inventory shrinkage between physical inventories. Physical inventory counts are
taken on a regular basis, and inventory is adjusted accordingly. For each reporting period presented, we estimate the inventory
shrinkage based on a two-year historical trend analysis. Changes in shrink results or market conditions could cause actual results
to vary from estimates used to establish the reserves.We have reserves for estimated obsolescence and to reduce inventory to the
lower of cost or market. We evaluate inventory for excess, obsolescence or other factors that may render inventories unmarketable
at their historical cost. If assumptions about future demand change or actual market conditions are less favorable than those projected
by management, we may require additional reserves.
As of February 3, 2013, and January 29, 2012, our inventory valuation reserves were $11.8 million and $11.6 million,
respectively.
Property and Equipment
Property and equipment are recorded at cost less accumulated depreciation and amortization. Depreciation is provided on
buildings, furniture, fixtures and equipment and computer software using the straight-line method over the estimated useful lives
of the related assets. Leasehold improvements and capital lease assets are amortized using the straight-line method over the shorter
of the lease term or the estimated useful lives of the related assets. Computer software consists primarily of third-party software
purchased for internal use. Costs associated with the preliminary stage of a project are expensed as incurred. Once the project is
in the development phase, external consulting costs, as well as qualifying internal labor costs, are capitalized. Training costs, data
conversion costs and maintenance costs are expensed as incurred. Maintenance and repairs to furniture, fixtures and equipment
are expensed as incurred.
Long-lived assets are reviewed for impairment based on undiscounted cash flows. We conduct this review quarterly and
whenever events or changes in circumstances indicate that the carrying amount of such assets may not be recoverable. If this
review indicates that the carrying amount of the long-lived assets is not recoverable, we will recognize an impairment loss, measured
at fair value by estimated discounted cash flows or market appraisals. No material asset impairments were identified during 2012,
2011 or 2010.
PetSmart, Inc. and Subsidiaries
Notes to the Consolidated Financial Statements — (Continued)