Pottery Barn 2012 Annual Report Download - page 60

Cost of Goods Sold
Cost of goods sold includes cost of goods, occupancy expenses and shipping costs. Cost of goods consists of cost
of merchandise, inbound freight expenses, freight-to-store expenses and other inventory related costs such as
shrinkage, damages and replacements. Occupancy expenses consist of rent, depreciation and other occupancy
costs, including common area maintenance and utilities. Shipping costs consist of third party delivery services
and shipping materials.
Selling, General and Administrative Expenses
Selling, general and administrative expenses consist of non-occupancy related costs associated with our retail
stores, distribution warehouses, customer care centers, supply chain operations (buying, receiving and inspection)
and corporate administrative functions. These costs include employment, advertising, third party credit card
processing and other general expenses.
Stock-Based Compensation
We account for stock-based compensation arrangements by measuring and recognizing compensation expense in
our consolidated financial statements for all stock-based awards using a fair value based-method. For stock
options and stock-settled stock appreciation rights (“option awards”), fair value is determined using the Black-
Scholes valuation model, while restricted stock units are valued using the closing price of our stock on the date
prior to the date of grant. Significant factors affecting the fair value of option awards include the estimated future
volatility of our stock price and the estimated expected term until the option award is exercised, converted or
cancelled. The fair value of each stock-based award is amortized over the requisite service period.
Foreign Currency Translation
As of February 3, 2013, our retail stores in Canada and our limited operations in Asia, Europe and Australia
expose us to market risk associated with foreign currency exchange rate fluctuations.
Additionally, some of our foreign operations have a functional currency different than the U.S. dollar, such as
those in Canada (Canadian dollar), Europe (euro or Great British pound) and Australia (Australian dollar). Assets
and liabilities are translated into U.S. dollars using the current exchange rates in effect at the balance sheet date,
while revenues and expenses are translated at the average exchange rates during the period. The resulting
translation adjustments are recorded as other comprehensive income within stockholders’ equity. Gains and
losses resulting from foreign currency transactions have not been significant and are included in selling, general
and administrative expenses.
Earnings Per Share
Basic earnings per share is computed as net earnings divided by the weighted average number of common shares
outstanding for the period. Diluted earnings per share is computed as net earnings divided by the weighted
average number of common shares outstanding for the period plus common stock equivalents. Common stock
equivalents consist of shares subject to option awards with exercise prices less than or equal to the average
market price of our common stock for the period, as well as restricted stock units, to the extent their inclusion
would be dilutive.
Income Taxes
Income taxes are accounted for using the asset and liability method. Under this method, deferred income taxes
arise from temporary differences between the tax basis of assets and liabilities and their reported amounts in the
consolidated financial statements. We record reserves for estimates of probable settlements of foreign and
domestic tax audits. At any one time, many tax years are subject to audit by various taxing jurisdictions. The
results of these audits and negotiations with taxing authorities may affect the ultimate settlement of these issues.
Additionally, our effective tax rate in a given financial statement period may be materially impacted by changes
in the mix and level of our earnings.
New Accounting Pronouncements
In June 2011, the Financial Accounting Standards Board issued Accounting Standards Update (“ASU”) 2011-05,
Comprehensive Income (Topic 220): Presentation of Comprehensive Income. This guidance revises the manner
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